Ratnamani Metals & Tubes (NSE:RATNAMANI) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ratnamani Metals & Tubes

What Is Ratnamani Metals & Tubes's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Ratnamani Metals & Tubes had ₹1.79b of debt, an increase on ₹1.38b, over one year. However, it does have ₹5.99b in cash offsetting this, leading to net cash of ₹4.20b.

How Healthy Is Ratnamani Metals & Tubes' Balance Sheet?

The latest balance sheet data shows that Ratnamani Metals & Tubes had liabilities of ₹3.88b due within a year, and liabilities of ₹2.22b falling due after that. Offsetting this, it had ₹5.99b in cash and ₹3.41b in receivables that were due within 12 months. So it actually has ₹3.30b more liquid assets than total liabilities.

This short term liquidity is a sign that Ratnamani Metals & Tubes could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ratnamani Metals & Tubes boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Ratnamani Metals & Tubes's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ratnamani Metals & Tubes's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ratnamani Metals & Tubes may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Ratnamani Metals & Tubes recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Ratnamani Metals & Tubes has net cash of ₹4.20b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹3.8b, being 69% of its EBIT. So we are not troubled with Ratnamani Metals & Tubes's debt use. 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. For instance, we've identified 2 warning signs for Ratnamani Metals & Tubes that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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