Does Rane (Madras) (NSE:RML) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Rane (Madras) Limited (NSE:RML) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Rane (Madras)

What Is Rane (Madras)'s Net Debt?

As you can see below, at the end of September 2020, Rane (Madras) had ₹3.75b of debt, up from ₹3.55b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹128.0m, its net debt is less, at about ₹3.63b.

How Strong Is Rane (Madras)'s Balance Sheet?

According to the last reported balance sheet, Rane (Madras) had liabilities of ₹5.55b due within 12 months, and liabilities of ₹2.63b due beyond 12 months. On the other hand, it had cash of ₹128.0m and ₹2.16b worth of receivables due within a year. So its liabilities total ₹5.89b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹3.21b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Rane (Madras) would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Rane (Madras)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Rane (Madras) had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₹10b. To be frank that doesn't bode well.

Caveat Emptor

While Rane (Madras)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹677m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹461m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Rane (Madras) you should be aware of, and 1 of them is a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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