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

Warren Buffett famously said, '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 Rajesh Exports Limited (NSE:RAJESHEXPO) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Rajesh Exports

What Is Rajesh Exports's Debt?

You can click the graphic below for the historical numbers, but it shows that Rajesh Exports had ₹6.27b of debt in September 2023, down from ₹7.20b, one year before. However, it does have ₹19.6b in cash offsetting this, leading to net cash of ₹13.4b.

How Strong Is Rajesh Exports' Balance Sheet?

The latest balance sheet data shows that Rajesh Exports had liabilities of ₹38.9b due within a year, and liabilities of ₹1.09b falling due after that. Offsetting these obligations, it had cash of ₹19.6b as well as receivables valued at ₹118.4b due within 12 months. So it actually has ₹98.0b more liquid assets than total liabilities.

This excess liquidity is a great indication that Rajesh Exports' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Rajesh Exports has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Rajesh Exports saw its EBIT drop by 4.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rajesh Exports can strengthen its balance sheet over time. 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. Rajesh Exports may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 ₹13.4b in net cash and a decent-looking balance sheet. So we are not troubled with Rajesh Exports's debt use. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.