Ruchi Infrastructure (NSE:RUCHINFRA) Is Making Moderate Use Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Ruchi Infrastructure Limited (NSE:RUCHINFRA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ruchi Infrastructure

What Is Ruchi Infrastructure's Net Debt?

As you can see below, Ruchi Infrastructure had ₹1.46b of debt at March 2022, down from ₹1.64b a year prior. However, it does have ₹204.0m in cash offsetting this, leading to net debt of about ₹1.26b.

How Strong Is Ruchi Infrastructure's Balance Sheet?

The latest balance sheet data shows that Ruchi Infrastructure had liabilities of ₹439.7m due within a year, and liabilities of ₹1.21b falling due after that. Offsetting these obligations, it had cash of ₹204.0m as well as receivables valued at ₹214.0m due within 12 months. So it has liabilities totalling ₹1.24b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹1.87b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Ruchi Infrastructure's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Ruchi Infrastructure wasn't profitable at an EBIT level, but managed to grow its revenue by 9.9%, to ₹698m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Ruchi Infrastructure had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹581m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹389m and the profit of ₹389m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Ruchi Infrastructure .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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