Health Check: How Prudently Does Ravi Kumar Distilleries (NSE:RKDL) Use 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. Importantly, Ravi Kumar Distilleries Limited (NSE:RKDL) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ravi Kumar Distilleries

What Is Ravi Kumar Distilleries's Debt?

As you can see below, Ravi Kumar Distilleries had ₹315.3m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹473.8m in cash offsetting this, leading to net cash of ₹158.5m.

A Look At Ravi Kumar Distilleries's Liabilities

The latest balance sheet data shows that Ravi Kumar Distilleries had liabilities of ₹657.8m due within a year, and liabilities of ₹140.3m falling due after that. On the other hand, it had cash of ₹473.8m and ₹255.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹68.7m.

While this might seem like a lot, it is not so bad since Ravi Kumar Distilleries has a market capitalization of ₹186.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Ravi Kumar Distilleries boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Ravi Kumar Distilleries'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, Ravi Kumar Distilleries made a loss at the EBIT level, and saw its revenue drop to ₹389m, which is a fall of 53%. To be frank that doesn't bode well.

So How Risky Is Ravi Kumar Distilleries?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ravi Kumar Distilleries lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₹6.2m of cash and made a loss of ₹51m. With only ₹158.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ravi Kumar Distilleries is showing 1 warning sign in our investment analysis , you should know about...

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. 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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