Here's Why Rajputana Biodiesel (NSE:RAJPUTANA) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Rajputana Biodiesel Limited (NSE:RAJPUTANA) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Rajputana Biodiesel's Debt?

As you can see below, Rajputana Biodiesel had ₹140.3m of debt at March 2025, down from ₹191.4m a year prior. However, because it has a cash reserve of ₹15.6m, its net debt is less, at about ₹124.7m.

How Strong Is Rajputana Biodiesel's Balance Sheet?

The latest balance sheet data shows that Rajputana Biodiesel had liabilities of ₹127.3m due within a year, and liabilities of ₹57.9m falling due after that. On the other hand, it had cash of ₹15.6m and ₹152.0m worth of receivables due within a year. So it has liabilities totalling ₹17.5m more than its cash and near-term receivables, combined.

Having regard to Rajputana Biodiesel's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹1.79b company is short on cash, but still worth keeping an eye on the balance sheet.

View our latest analysis for Rajputana Biodiesel

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Rajputana Biodiesel's low debt to EBITDA ratio of 1.4 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 4.6 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. One way Rajputana Biodiesel could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 12%, as it did over the last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rajputana Biodiesel will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Rajputana Biodiesel burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Rajputana Biodiesel is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we thought its EBIT growth rate was a positive. Looking at all this data makes us feel a little cautious about Rajputana Biodiesel's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Rajputana Biodiesel (at least 1 which can't be ignored) , 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.