Does Elgi Rubber (NSE:ELGIRUBCO) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Elgi Rubber Company Limited (NSE:ELGIRUBCO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Elgi Rubber

What Is Elgi Rubber's Debt?

As you can see below, Elgi Rubber had ₹2.73b of debt at September 2024, down from ₹2.88b a year prior. However, it also had ₹355.3m in cash, and so its net debt is ₹2.37b.

A Look At Elgi Rubber's Liabilities

We can see from the most recent balance sheet that Elgi Rubber had liabilities of ₹2.31b falling due within a year, and liabilities of ₹953.3m due beyond that. Offsetting these obligations, it had cash of ₹355.3m as well as receivables valued at ₹662.7m due within 12 months. So it has liabilities totalling ₹2.24b more than its cash and near-term receivables, combined.

Elgi Rubber has a market capitalization of ₹4.61b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Elgi Rubber will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Elgi Rubber had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to ₹3.9b. We would much prefer see growth.

Caveat Emptor

Importantly, Elgi Rubber had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹31m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹626m in negative free cash flow over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. For example Elgi Rubber has 4 warning signs (and 2 which are concerning) we think you should know about.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.