Ratnamani Metals & Tubes (NSE:RATNAMANI) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Ratnamani Metals & Tubes Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ratnamani Metals & Tubes had ₹2.56b of debt, an increase on ₹1.66b, over one year. However, because it has a cash reserve of ₹1.38b, its net debt is less, at about ₹1.18b.

How Strong Is Ratnamani Metals & Tubes' Balance Sheet?

According to the last reported balance sheet, Ratnamani Metals & Tubes had liabilities of ₹7.97b due within 12 months, and liabilities of ₹1.97b due beyond 12 months. Offsetting this, it had ₹1.38b in cash and ₹9.10b in receivables that were due within 12 months. So it actually has ₹549.0m 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 ₹219.7b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Ratnamani Metals & Tubes has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Ratnamani Metals & Tubes has a low net debt to EBITDA ratio of only 0.15. And its EBIT easily covers its interest expense, being 30.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In fact Ratnamani Metals & Tubes's saving grace is its low debt levels, because its EBIT has tanked 23% 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 ultimately the future profitability of the business will decide if Ratnamani Metals & Tubes can strengthen its balance sheet over time. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Ratnamani Metals & Tubes barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Our View

While Ratnamani Metals & Tubes's EBIT growth rate has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that Ratnamani Metals & Tubes is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Ratnamani Metals & Tubes you should be aware of, and 1 of them makes us a bit uncomfortable.

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.