R.P.P. Infra Projects (NSE:RPPINFRA) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies R.P.P. Infra Projects Limited (NSE:RPPINFRA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for R.P.P. Infra Projects

What Is R.P.P. Infra Projects's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 R.P.P. Infra Projects had ₹1.01b of debt, an increase on ₹969.9m, over one year. But on the other hand it also has ₹1.07b in cash, leading to a ₹64.1m net cash position.

How Healthy Is R.P.P. Infra Projects' Balance Sheet?

According to the last reported balance sheet, R.P.P. Infra Projects had liabilities of ₹2.82b due within 12 months, and liabilities of ₹649.8m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.07b as well as receivables valued at ₹3.48b due within 12 months. So it actually has ₹1.08b more liquid assets than total liabilities.

This luscious liquidity implies that R.P.P. Infra Projects' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that R.P.P. Infra Projects has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that R.P.P. Infra Projects's EBIT was down 26% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since R.P.P. Infra Projects 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While R.P.P. Infra Projects 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. Looking at the most recent three years, R.P.P. Infra Projects recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that R.P.P. Infra Projects has net cash of ₹64.1m, as well as more liquid assets than liabilities. So we are not troubled with R.P.P. Infra Projects's debt use. 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. For example R.P.P. Infra Projects has 3 warning signs (and 1 which can't be ignored) 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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