Is Raymond Lifestyle (NSE:RAYMONDLSL) 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.' 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. We can see that Raymond Lifestyle Limited (NSE:RAYMONDLSL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 Raymond Lifestyle

How Much Debt Does Raymond Lifestyle Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Raymond Lifestyle had ₹21.1b of debt, an increase on none, over one year. However, because it has a cash reserve of ₹7.73b, its net debt is less, at about ₹13.4b.

How Healthy Is Raymond Lifestyle's Balance Sheet?

The latest balance sheet data shows that Raymond Lifestyle had liabilities of ₹30.9b due within a year, and liabilities of ₹9.95b falling due after that. On the other hand, it had cash of ₹7.73b and ₹12.4b worth of receivables due within a year. So its liabilities total ₹20.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Raymond Lifestyle has a market capitalization of ₹63.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Raymond Lifestyle 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.

It seems likely shareholders hope that Raymond Lifestyle can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

While Raymond Lifestyle's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹1.0b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹364m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Raymond Lifestyle I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.