Is Indo Rama Synthetics (India) (NSE:INDORAMA) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Indo Rama Synthetics (India) Limited (NSE:INDORAMA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Indo Rama Synthetics (India)

What Is Indo Rama Synthetics (India)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Indo Rama Synthetics (India) had ₹8.90b of debt, an increase on ₹3.58b, over one year. On the flip side, it has ₹729.2m in cash leading to net debt of about ₹8.17b.

How Strong Is Indo Rama Synthetics (India)'s Balance Sheet?

The latest balance sheet data shows that Indo Rama Synthetics (India) had liabilities of ₹15.2b due within a year, and liabilities of ₹6.24b falling due after that. Offsetting these obligations, it had cash of ₹729.2m as well as receivables valued at ₹4.55b due within 12 months. So its liabilities total ₹16.1b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₹12.5b, we think shareholders really should watch Indo Rama Synthetics (India)'s debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Indo Rama Synthetics (India) 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 Indo Rama Synthetics (India) had a loss before interest and tax, and actually shrunk its revenue by 19%, to ₹37b. That's not what we would hope to see.

Caveat Emptor

Not only did Indo Rama Synthetics (India)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹737m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹4.5b in negative free cash flow over the last year. That means it's on the risky side of things. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Indo Rama Synthetics (India) insider transactions.

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. 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.