Is Rail Vikas Nigam (NSE:RVNL) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Rail Vikas Nigam Limited (NSE:RVNL) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Rail Vikas Nigam

What Is Rail Vikas Nigam's Debt?

The image below, which you can click on for greater detail, shows that Rail Vikas Nigam had debt of ₹54.0b at the end of September 2024, a reduction from ₹59.6b over a year. However, it does have ₹44.0b in cash offsetting this, leading to net debt of about ₹10.0b.

How Strong Is Rail Vikas Nigam's Balance Sheet?

We can see from the most recent balance sheet that Rail Vikas Nigam had liabilities of ₹66.5b falling due within a year, and liabilities of ₹49.7b due beyond that. Offsetting these obligations, it had cash of ₹44.0b as well as receivables valued at ₹19.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹53.1b.

Since publicly traded Rail Vikas Nigam shares are worth a very impressive total of ₹908.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Rail Vikas Nigam has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Rail Vikas Nigam has a low net debt to EBITDA ratio of only 0.86. And its EBIT covers its interest expense a whopping 391 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Rail Vikas Nigam saw its EBIT drop by 8.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rail Vikas Nigam 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Rail Vikas Nigam actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Rail Vikas Nigam's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its EBIT growth rate. When we consider the range of factors above, it looks like Rail Vikas Nigam is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Rail Vikas Nigam's earnings per share history for free.

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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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.