Is Elgi Rubber (NSE:ELGIRUBCO) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Elgi Rubber Company Limited (NSE:ELGIRUBCO) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Elgi Rubber

What Is Elgi Rubber's Debt?

As you can see below, Elgi Rubber had ₹2.32b of debt at September 2020, down from ₹2.52b a year prior. However, it does have ₹291.3m in cash offsetting this, leading to net debt of about ₹2.03b.

How Healthy Is Elgi Rubber's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elgi Rubber had liabilities of ₹2.28b due within 12 months and liabilities of ₹892.5m due beyond that. Offsetting these obligations, it had cash of ₹291.3m as well as receivables valued at ₹539.6m due within 12 months. So its liabilities total ₹2.34b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹1.05b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Elgi Rubber would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Elgi Rubber'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.

Over 12 months, Elgi Rubber made a loss at the EBIT level, and saw its revenue drop to ₹3.3b, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did Elgi Rubber's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹52m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹226m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Elgi Rubber (at least 1 which is concerning) , and understanding them should be part of your investment process.

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. 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.
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