These 4 Measures Indicate That R.P.P. Infra Projects (NSE:RPPINFRA) Is Using Debt Reasonably Well

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 note that R.P.P. Infra Projects Limited (NSE:RPPINFRA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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

How Much Debt Does R.P.P. Infra Projects Carry?

You can click the graphic below for the historical numbers, but it shows that R.P.P. Infra Projects had ₹409.9m of debt in March 2024, down from ₹794.3m, one year before. However, it also had ₹394.5m in cash, and so its net debt is ₹15.4m.

A Look At R.P.P. Infra Projects' Liabilities

We can see from the most recent balance sheet that R.P.P. Infra Projects had liabilities of ₹3.93b falling due within a year, and liabilities of ₹235.9m due beyond that. On the other hand, it had cash of ₹394.5m and ₹3.44b worth of receivables due within a year. So its liabilities total ₹336.4m more than the combination of its cash and short-term receivables.

Of course, R.P.P. Infra Projects has a market capitalization of ₹7.61b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, R.P.P. Infra Projects has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

R.P.P. Infra Projects's net debt to EBITDA ratio is very low, at 0.027, suggesting the debt is only trivial. But EBIT was only 3.9 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. One way R.P.P. Infra Projects could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 15%, as it did over the last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is R.P.P. Infra Projects's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, R.P.P. Infra Projects produced sturdy free cash flow equating to 56% 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.

Our View

The good news is that R.P.P. Infra Projects's demonstrated ability handle its debt, based on its EBITDA, delights us like a fluffy puppy does a toddler. But truth be told we feel its interest cover does undermine this impression a bit. When we consider the range of factors above, it looks like R.P.P. Infra Projects is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. To that end, you should learn about the 2 warning signs we've spotted with R.P.P. Infra Projects (including 1 which shouldn't be ignored) .

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.

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