Rolex Rings (NSE:ROLEXRINGS) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Rolex Rings Limited (NSE:ROLEXRINGS) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Rolex Rings

What Is Rolex Rings's Debt?

The image below, which you can click on for greater detail, shows that Rolex Rings had debt of ₹213.3m at the end of September 2024, a reduction from ₹404.0m over a year. However, its balance sheet shows it holds ₹2.46b in cash, so it actually has ₹2.25b net cash.

A Look At Rolex Rings' Liabilities

According to the last reported balance sheet, Rolex Rings had liabilities of ₹1.70b due within 12 months, and liabilities of ₹629.7m due beyond 12 months. On the other hand, it had cash of ₹2.46b and ₹2.07b worth of receivables due within a year. So it can boast ₹2.21b more liquid assets than total liabilities.

This short term liquidity is a sign that Rolex Rings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Rolex Rings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Rolex Rings saw its EBIT decline by 7.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rolex Rings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Rolex Rings 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. During the last three years, Rolex Rings produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rolex Rings has ₹2.25b in net cash and a decent-looking balance sheet. So we don't have any problem with Rolex Rings's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Rolex Rings, you may well want to click here to check an interactive graph of its earnings per share history.

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.