Health Check: How Prudently Does Rollatainers (NSE:ROLLT) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Rollatainers Limited (NSE:ROLLT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rollatainers

What Is Rollatainers's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Rollatainers had ₹247.3m of debt in March 2021, down from ₹1.64b, one year before. However, because it has a cash reserve of ₹11.0m, its net debt is less, at about ₹236.3m.

A Look At Rollatainers' Liabilities

We can see from the most recent balance sheet that Rollatainers had liabilities of ₹905.9m falling due within a year, and liabilities of ₹260.7m due beyond that. Offsetting this, it had ₹11.0m in cash and ₹262.5m in receivables that were due within 12 months. So it has liabilities totalling ₹893.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹557.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Rollatainers would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rollatainers 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.

Over 12 months, Rollatainers made a loss at the EBIT level, and saw its revenue drop to ₹584m, which is a fall of 59%. That makes us nervous, to say the least.

Caveat Emptor

While Rollatainers's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹293m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹14m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. We've identified 4 warning signs with Rollatainers (at least 3 which are significant) , and understanding them should be part of your investment process.

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.
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