Is Indo Rama Synthetics (India) (NSE:INDORAMA) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Indo Rama Synthetics (India) Limited (NSE:INDORAMA) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Indo Rama Synthetics (India)

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

The image below, which you can click on for greater detail, shows that at September 2020 Indo Rama Synthetics (India) had debt of ₹5.26b, up from ₹3.94b in one year. However, it does have ₹222.9m in cash offsetting this, leading to net debt of about ₹5.04b.

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

We can see from the most recent balance sheet that Indo Rama Synthetics (India) had liabilities of ₹9.39b falling due within a year, and liabilities of ₹3.21b due beyond that. Offsetting these obligations, it had cash of ₹222.9m as well as receivables valued at ₹872.0m due within 12 months. So its liabilities total ₹11.5b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₹9.11b, 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 it is Indo Rama Synthetics (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Indo Rama Synthetics (India) made a loss at the EBIT level, and saw its revenue drop to ₹17b, which is a fall of 18%. We would much prefer see growth.

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 ₹505m. 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. It's fair to say the loss of ₹653m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. For example, we've discovered 2 warning signs for Indo Rama Synthetics (India) (1 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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