Is Bombay Rayon Fashions (NSE:BRFL) A Risky Investment?

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.' 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. We can see that Bombay Rayon Fashions Limited (NSE:BRFL) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bombay Rayon Fashions

How Much Debt Does Bombay Rayon Fashions Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Bombay Rayon Fashions had debt of ₹51.1b, up from ₹46.8b in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Bombay Rayon Fashions's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bombay Rayon Fashions had liabilities of ₹48.6b due within 12 months and liabilities of ₹9.79b due beyond that. Offsetting this, it had ₹361.2m in cash and ₹13.8b in receivables that were due within 12 months. So its liabilities total ₹44.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹3.11b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Bombay Rayon Fashions would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bombay Rayon Fashions will need earnings to service that debt. 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.

In the last year Bombay Rayon Fashions had a loss before interest and tax, and actually shrunk its revenue by 61%, to ₹2.5b. That makes us nervous, to say the least.

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 ₹12b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹12b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Bombay Rayon Fashions (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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.
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