Is Shree Rama Newsprint (NSE:RAMANEWS) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shree Rama Newsprint Limited (NSE:RAMANEWS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shree Rama Newsprint

What Is Shree Rama Newsprint's Debt?

As you can see below, Shree Rama Newsprint had ₹3.69b of debt at September 2023, down from ₹4.58b a year prior. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Shree Rama Newsprint's Balance Sheet?

According to the last reported balance sheet, Shree Rama Newsprint had liabilities of ₹1.48b due within 12 months, and liabilities of ₹3.50b due beyond 12 months. Offsetting these obligations, it had cash of ₹639.0k as well as receivables valued at ₹45.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.94b.

This deficit casts a shadow over the ₹3.21b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shree Rama Newsprint had a loss before interest and tax, and actually shrunk its revenue by 74%, to ₹475m. To be frank that doesn't bode well.

Caveat Emptor

While Shree Rama Newsprint's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹5.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹172m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shree Rama Newsprint (of which 2 are concerning!) you should know about.

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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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.