These 4 Measures Indicate That Ratnamani Metals & Tubes (NSE:RATNAMANI) Is Using Debt Reasonably Well

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. We note that Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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, Ratnamani Metals & Tubes had ₹1.57b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹1.52b, its net debt is less, at about ₹51.4m.

A Look At Ratnamani Metals & Tubes' Liabilities

Zooming in on the latest balance sheet data, we can see that Ratnamani Metals & Tubes had liabilities of ₹5.66b due within 12 months and liabilities of ₹1.48b due beyond that. Offsetting this, it had ₹1.52b in cash and ₹6.01b in receivables that were due within 12 months. So it can boast ₹391.1m 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 ₹138.2b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Ratnamani Metals & Tubes has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Ratnamani Metals & Tubes has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.0094 and EBIT of 37.6 times the interest expense. So relative to past earnings, the debt load seems trivial. On top of that, Ratnamani Metals & Tubes grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ratnamani Metals & Tubes will need earnings to service that debt. 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.

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. Considering the last three years, Ratnamani Metals & Tubes actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

Ratnamani Metals & Tubes's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Taking all this data into account, it seems to us that Ratnamani Metals & Tubes takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. There's no doubt that we learn most about debt from the balance sheet. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.