Is R R Kabel (NSE:RRKABEL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that R R Kabel Limited (NSE:RRKABEL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for R R Kabel

What Is R R Kabel's Debt?

The image below, which you can click on for greater detail, shows that R R Kabel had debt of ₹2.89b at the end of March 2024, a reduction from ₹5.16b over a year. But on the other hand it also has ₹3.34b in cash, leading to a ₹448.7m net cash position.

A Look At R R Kabel's Liabilities

The latest balance sheet data shows that R R Kabel had liabilities of ₹9.42b due within a year, and liabilities of ₹986.3m falling due after that. Offsetting these obligations, it had cash of ₹3.34b as well as receivables valued at ₹6.42b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹650.2m.

This state of affairs indicates that R R Kabel's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹204.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, R R Kabel boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, R R Kabel grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine R R Kabel's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. R R Kabel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, R R Kabel recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 look at a company's total liabilities, it is very reassuring that R R Kabel has ₹448.7m in net cash. And we liked the look of last year's 51% year-on-year EBIT growth. So is R R Kabel's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for R R Kabel you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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