Is Rane (Madras) (NSE:RML) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Rane (Madras) Limited (NSE:RML) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Rane (Madras)

What Is Rane (Madras)'s Debt?

The chart below, which you can click on for greater detail, shows that Rane (Madras) had ₹4.60b in debt in March 2021; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

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

According to the last reported balance sheet, Rane (Madras) had liabilities of ₹6.21b due within 12 months, and liabilities of ₹2.30b due beyond 12 months. Offsetting this, it had ₹71.3m in cash and ₹2.71b in receivables that were due within 12 months. So its liabilities total ₹5.72b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹6.24b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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)'s revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Rane (Madras) produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹353m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹347m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Rane (Madras) you should be aware of, and 2 of them don't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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