Is Shree Rama Newsprint (NSE:RAMANEWS) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Shree Rama Newsprint Limited (NSE:RAMANEWS) does carry debt. 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. 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. 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.

Check out our latest analysis for Shree Rama Newsprint

What Is Shree Rama Newsprint's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Shree Rama Newsprint had debt of ₹4.30b, up from ₹3.93b in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Shree Rama Newsprint's Liabilities

According to the last reported balance sheet, Shree Rama Newsprint had liabilities of ₹4.42b due within 12 months, and liabilities of ₹1.00b due beyond 12 months. Offsetting these obligations, it had cash of ₹4.18m as well as receivables valued at ₹273.8m due within 12 months. So it has liabilities totalling ₹5.14b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹2.77b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Shree Rama Newsprint would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Shree Rama Newsprint had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₹2.6b. 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. Indeed, it lost a very considerable ₹431m at the EBIT level. 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. Not least because it burned through ₹183m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Shree Rama Newsprint you should be aware of, and 2 of them are potentially serious.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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