Rajshree Sugars and Chemicals (NSE:RAJSREESUG) Has Debt But No Earnings; Should You Worry?

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.' 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 Rajshree Sugars and Chemicals Limited (NSE:RAJSREESUG) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Rajshree Sugars and Chemicals

What Is Rajshree Sugars and Chemicals's Net Debt?

The image below, which you can click on for greater detail, shows that Rajshree Sugars and Chemicals had debt of ₹1.71b at the end of September 2020, a reduction from ₹2.34b over a year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Rajshree Sugars and Chemicals's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rajshree Sugars and Chemicals had liabilities of ₹5.25b due within 12 months and liabilities of ₹1.07b due beyond that. Offsetting this, it had ₹20.2m in cash and ₹381.8m in receivables that were due within 12 months. So its liabilities total ₹5.92b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹436.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Rajshree Sugars and Chemicals would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Rajshree Sugars and Chemicals'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.

Over 12 months, Rajshree Sugars and Chemicals made a loss at the EBIT level, and saw its revenue drop to ₹3.3b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Rajshree Sugars and Chemicals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹91m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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 ₹506m in the last year. So we think buying this stock is risky. 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. Case in point: We've spotted 2 warning signs for Rajshree Sugars and Chemicals you should be aware of.

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. 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.
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