Is Revathi Equipment (NSE:REVATHI) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Revathi Equipment Limited (NSE:REVATHI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Revathi Equipment

What Is Revathi Equipment's Net Debt?

As you can see below, Revathi Equipment had ₹281.3m of debt at March 2022, down from ₹335.4m a year prior. But on the other hand it also has ₹720.9m in cash, leading to a ₹439.6m net cash position.

How Healthy Is Revathi Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Revathi Equipment had liabilities of ₹1.04b due within 12 months and liabilities of ₹93.1m due beyond that. On the other hand, it had cash of ₹720.9m and ₹435.5m worth of receivables due within a year. So it can boast ₹26.1m more liquid assets than total liabilities.

Having regard to Revathi Equipment's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹1.97b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Revathi Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Revathi Equipment's EBIT launched higher than Elon Musk, gaining a whopping 158% on last year. 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 Revathi Equipment will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Revathi Equipment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Revathi Equipment actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Revathi Equipment has ₹439.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹446m, being 126% of its EBIT. So we don't think Revathi Equipment's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Revathi Equipment you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.