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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Elgi Rubber Company Limited (NSE:ELGIRUBCO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Elgi Rubber

What Is Elgi Rubber's Debt?

You can click the graphic below for the historical numbers, but it shows that Elgi Rubber had ₹2.04b of debt in September 2021, down from ₹2.32b, one year before. On the flip side, it has ₹307.3m in cash leading to net debt of about ₹1.73b.

A Look At Elgi Rubber's Liabilities

Zooming in on the latest balance sheet data, we can see that Elgi Rubber had liabilities of ₹2.36b due within 12 months and liabilities of ₹740.0m due beyond that. Offsetting these obligations, it had cash of ₹307.3m as well as receivables valued at ₹479.4m due within 12 months. So it has liabilities totalling ₹2.32b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹2.36b, so it does suggest shareholders should keep an eye on Elgi Rubber's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 9.5%, to ₹3.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Elgi Rubber produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹33m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹508m and the profit of ₹15m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Elgi Rubber you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.