Is Rajesh Exports (NSE:RAJESHEXPO) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Rajesh Exports Limited (NSE:RAJESHEXPO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Rajesh Exports

How Much Debt Does Rajesh Exports Carry?

The image below, which you can click on for greater detail, shows that Rajesh Exports had debt of ₹7.24b at the end of March 2023, a reduction from ₹8.15b over a year. But it also has ₹21.0b in cash to offset that, meaning it has ₹13.7b net cash.

How Healthy Is Rajesh Exports' Balance Sheet?

The latest balance sheet data shows that Rajesh Exports had liabilities of ₹80.4b due within a year, and liabilities of ₹1.12b falling due after that. On the other hand, it had cash of ₹21.0b and ₹107.3b worth of receivables due within a year. So it can boast ₹46.8b more liquid assets than total liabilities.

This luscious liquidity implies that Rajesh Exports' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Rajesh Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Rajesh Exports grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Rajesh Exports's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, Rajesh Exports burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rajesh Exports has ₹13.7b in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think Rajesh Exports's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Rajesh Exports's earnings per share history for free.

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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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.