Ravi Kumar Distilleries (NSE:RKDL) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ravi Kumar Distilleries

How Much Debt Does Ravi Kumar Distilleries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Ravi Kumar Distilleries had ₹390.2m of debt, an increase on ₹322.9m, over one year. However, because it has a cash reserve of ₹25.6m, its net debt is less, at about ₹364.6m.

A Look At Ravi Kumar Distilleries' Liabilities

Zooming in on the latest balance sheet data, we can see that Ravi Kumar Distilleries had liabilities of ₹703.6m due within 12 months and liabilities of ₹161.8m due beyond that. Offsetting this, it had ₹25.6m in cash and ₹669.6m in receivables that were due within 12 months. So it has liabilities totalling ₹170.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ravi Kumar Distilleries has a market capitalization of ₹308.2m, 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Ravi Kumar Distilleries wasn't profitable at an EBIT level, but managed to grow its revenue by 180%, to ₹294m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Ravi Kumar Distilleries still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹12m. 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 ₹86m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Be aware that Ravi Kumar Distilleries is showing 5 warning signs in our investment analysis , and 4 of those are concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.