Is Ratnamani Metals & Tubes (NSE:RATNAMANI) Using Too Much Debt?

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. Importantly, Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ratnamani Metals & Tubes

What Is Ratnamani Metals & Tubes's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ratnamani Metals & Tubes had ₹1.42b of debt in March 2024, down from ₹2.24b, one year before. But it also has ₹2.96b in cash to offset that, meaning it has ₹1.53b net cash.

How Strong Is Ratnamani Metals & Tubes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ratnamani Metals & Tubes had liabilities of ₹6.00b due within 12 months and liabilities of ₹2.04b due beyond that. Offsetting this, it had ₹2.96b in cash and ₹9.42b in receivables that were due within 12 months. So it actually has ₹4.34b 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 ₹240.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ratnamani Metals & Tubes has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Ratnamani Metals & Tubes grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ratnamani Metals & Tubes's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 2.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ratnamani Metals & Tubes has ₹1.53b in net cash and a decent-looking balance sheet. And we liked the look of last year's 15% year-on-year EBIT growth. So we don't have any problem with Ratnamani Metals & Tubes's use of debt. 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 1 warning sign for Ratnamani Metals & Tubes you should be aware of.

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.