We Think Rajesh Exports (NSE:RAJESHEXPO) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Rajesh Exports Limited (NSE:RAJESHEXPO) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Rajesh Exports

What Is Rajesh Exports's Net Debt?

The chart below, which you can click on for greater detail, shows that Rajesh Exports had ₹7.20b in debt in September 2022; about the same as the year before. However, its balance sheet shows it holds ₹18.2b in cash, so it actually has ₹11.0b net cash.

How Healthy Is Rajesh Exports' Balance Sheet?

The latest balance sheet data shows that Rajesh Exports had liabilities of ₹109.2b due within a year, and liabilities of ₹853.6m falling due after that. Offsetting this, it had ₹18.2b in cash and ₹108.9b in receivables that were due within 12 months. So it actually has ₹17.0b more liquid assets than total liabilities.

This surplus suggests that Rajesh Exports has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Rajesh Exports has more cash than debt is arguably a good indication that it can manage its debt safely.

Rajesh Exports's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Rajesh Exports saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rajesh Exports has net cash of ₹11.0b, as well as more liquid assets than liabilities. 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. We've identified 1 warning sign with Rajesh Exports , and understanding them should be part of your investment process.

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.