Health Check: How Prudently Does Bombay Rayon Fashions (NSE:BRFL) Use Debt?

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.' 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 Bombay Rayon Fashions Limited (NSE:BRFL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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.

Check out our latest analysis for Bombay Rayon Fashions

What Is Bombay Rayon Fashions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bombay Rayon Fashions had ₹38.9b of debt in September 2021, down from ₹51.1b, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Bombay Rayon Fashions' Balance Sheet?

According to the last reported balance sheet, Bombay Rayon Fashions had liabilities of ₹44.7b due within 12 months, and liabilities of ₹9.56b due beyond 12 months. Offsetting these obligations, it had cash of ₹264.0m as well as receivables valued at ₹12.1b due within 12 months. So it has liabilities totalling ₹41.9b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹2.06b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bombay Rayon Fashions would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bombay Rayon Fashions 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.

Over 12 months, Bombay Rayon Fashions made a loss at the EBIT level, and saw its revenue drop to ₹1.2b, which is a fall of 53%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Bombay Rayon Fashions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹4.0b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But we note that trailing twelve month EBIT is worse than the free cash flow of ₹3.6b and the profit of ₹71m. So its situation may not be as precarious as the EBIT would imply. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Bombay Rayon Fashions is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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

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.