Is Ravi Kumar Distilleries (NSE:RKDL) Using Too Much Debt?

Warren Buffett famously said, '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 note that Ravi Kumar Distilleries Limited (NSE:RKDL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ravi Kumar Distilleries

What Is Ravi Kumar Distilleries's Net Debt?

The chart below, which you can click on for greater detail, shows that Ravi Kumar Distilleries had ₹317.4m in debt in March 2021; about the same as the year before. However, it does have ₹34.5m in cash offsetting this, leading to net debt of about ₹282.9m.

How Strong Is Ravi Kumar Distilleries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ravi Kumar Distilleries had liabilities of ₹645.9m due within 12 months and liabilities of ₹126.7m due beyond that. Offsetting this, it had ₹34.5m in cash and ₹654.2m in receivables that were due within 12 months. So its liabilities total ₹83.9m more than the combination of its cash and short-term receivables.

Ravi Kumar Distilleries has a market capitalization of ₹332.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ravi Kumar Distilleries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ravi Kumar Distilleries made a loss at the EBIT level, and saw its revenue drop to ₹2.2m, which is a fall of 100%. That makes us nervous, to say the least.

Caveat Emptor

While Ravi Kumar Distilleries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹54m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹1.9m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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 3 warning signs with Ravi Kumar Distilleries (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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