Is Rama Phosphates (NSE:RAMAPHO) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Rama Phosphates Limited (NSE:RAMAPHO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Rama Phosphates

What Is Rama Phosphates's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Rama Phosphates had ₹1.14b of debt, an increase on ₹997.6m, over one year. However, it does have ₹102.9m in cash offsetting this, leading to net debt of about ₹1.03b.

How Healthy Is Rama Phosphates' Balance Sheet?

We can see from the most recent balance sheet that Rama Phosphates had liabilities of ₹2.49b falling due within a year, and liabilities of ₹110.8m due beyond that. On the other hand, it had cash of ₹102.9m and ₹1.83b worth of receivables due within a year. So its liabilities total ₹674.1m more than the combination of its cash and short-term receivables.

Of course, Rama Phosphates has a market capitalization of ₹4.05b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rama Phosphates 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 Rama Phosphates had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₹6.7b. That's not what we would hope to see.

Caveat Emptor

Not only did Rama Phosphates's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹249m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹222m into a profit. So to be blunt we do think it is risky. 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. For example, we've discovered 2 warning signs for Rama Phosphates (1 is concerning!) that you should be aware of before investing here.

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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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.