Is McLeod Russel India (NSE:MCLEODRUSS) A Risky Investment?

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. Importantly, McLeod Russel India Limited (NSE:MCLEODRUSS) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for McLeod Russel India

What Is McLeod Russel India's Net Debt?

The image below, which you can click on for greater detail, shows that McLeod Russel India had debt of ₹20.8b at the end of March 2022, a reduction from ₹22.5b over a year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is McLeod Russel India's Balance Sheet?

According to the last reported balance sheet, McLeod Russel India had liabilities of ₹28.3b due within 12 months, and liabilities of ₹2.89b due beyond 12 months. Offsetting this, it had ₹268.4m in cash and ₹743.6m in receivables that were due within 12 months. So its liabilities total ₹30.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹2.02b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, McLeod Russel India would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is McLeod Russel India's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year McLeod Russel India had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to ₹14b. We would much prefer see growth.

Caveat Emptor

Importantly, McLeod Russel India had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹68m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹1.8b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Case in point: We've spotted 3 warning signs for McLeod Russel India you should be aware of, and 1 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.