Here's Why Rajesh Exports (NSE:RAJESHEXPO) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Rajesh Exports Limited (NSE:RAJESHEXPO) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Rajesh Exports

What Is Rajesh Exports's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Rajesh Exports had debt of ₹7.36b, up from ₹6.27b in one year. But it also has ₹25.3b in cash to offset that, meaning it has ₹18.0b net cash.

A Look At Rajesh Exports' Liabilities

Zooming in on the latest balance sheet data, we can see that Rajesh Exports had liabilities of ₹74.9b due within 12 months and liabilities of ₹1.31b due beyond that. On the other hand, it had cash of ₹25.3b and ₹117.0b worth of receivables due within a year. So it can boast ₹66.1b more liquid assets than total liabilities.

This surplus liquidity suggests that Rajesh Exports' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Rajesh Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Rajesh Exports's EBIT fell a jaw-dropping 92% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Rajesh Exports'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Rajesh Exports has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Rajesh Exports's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rajesh Exports has ₹18.0b in net cash and a strong balance sheet. So we don't have any problem with Rajesh Exports's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Rajesh Exports is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.