Health Check: How Prudently Does Shree Rama Newsprint (NSE:RAMANEWS) 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.' 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. We note that Shree Rama Newsprint Limited (NSE:RAMANEWS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shree Rama Newsprint

What Is Shree Rama Newsprint's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Shree Rama Newsprint had ₹4.74b of debt, an increase on ₹3.89b, over one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Shree Rama Newsprint's Balance Sheet?

The latest balance sheet data shows that Shree Rama Newsprint had liabilities of ₹4.75b due within a year, and liabilities of ₹987.4m falling due after that. Offsetting this, it had ₹1.96m in cash and ₹270.0m in receivables that were due within 12 months. So it has liabilities totalling ₹5.46b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹2.98b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Shree Rama Newsprint would likely require a major re-capitalisation if it had to pay its creditors today. 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 Shree Rama Newsprint 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, Shree Rama Newsprint reported revenue of ₹4.0b, which is a gain of 55%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Shree Rama Newsprint's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping ₹313m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹365m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Shree Rama Newsprint (2 make us uncomfortable) you should be aware of.

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.