Here's Why Ravi Kumar Distilleries (NSE:RKDL) Can Afford Some Debt

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.' 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 Ravi Kumar Distilleries Limited (NSE:RKDL) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ravi Kumar Distilleries

How Much Debt Does Ravi Kumar Distilleries Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Ravi Kumar Distilleries had debt of ₹401.6m, up from ₹336.8m in one year. However, it also had ₹26.2m in cash, and so its net debt is ₹375.4m.

How Healthy Is Ravi Kumar Distilleries' Balance Sheet?

According to the last reported balance sheet, Ravi Kumar Distilleries had liabilities of ₹724.8m due within 12 months, and liabilities of ₹175.5m due beyond 12 months. Offsetting this, it had ₹26.2m in cash and ₹694.2m in receivables that were due within 12 months. So its liabilities total ₹179.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ravi Kumar Distilleries has a market capitalization of ₹575.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ravi Kumar Distilleries 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.

Over 12 months, Ravi Kumar Distilleries made a loss at the EBIT level, and saw its revenue drop to ₹237m, which is a fall of 20%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ravi Kumar Distilleries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹45m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹69m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Ravi Kumar Distilleries (at least 3 which are potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.