Here's Why Ratnamani Metals & Tubes (NSE:RATNAMANI) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ratnamani Metals & Tubes

What Is Ratnamani Metals & Tubes's Net Debt?

As you can see below, at the end of September 2023, Ratnamani Metals & Tubes had ₹1.66b of debt, up from ₹1.29b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹2.92b in cash, so it actually has ₹1.26b net cash.

A Look At Ratnamani Metals & Tubes' Liabilities

According to the last reported balance sheet, Ratnamani Metals & Tubes had liabilities of ₹5.77b due within 12 months, and liabilities of ₹2.48b due beyond 12 months. On the other hand, it had cash of ₹2.92b and ₹7.77b worth of receivables due within a year. So it actually has ₹2.44b more liquid assets than total liabilities.

This state of affairs indicates that Ratnamani Metals & Tubes' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹255.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Ratnamani Metals & Tubes boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ratnamani Metals & Tubes grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ratnamani Metals & Tubes can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ratnamani Metals & Tubes has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Ratnamani Metals & Tubes created free cash flow amounting to 7.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ratnamani Metals & Tubes has net cash of ₹1.26b, as well as more liquid assets than liabilities. And we liked the look of last year's 73% year-on-year EBIT growth. So is Ratnamani Metals & Tubes's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Ratnamani Metals & Tubes that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.