Is Rollatainers (NSE:ROLLT) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 Rollatainers

What Is Rollatainers's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Rollatainers had ₹1.68b of debt, an increase on ₹303.2m, over one year. However, it does have ₹96.1m in cash offsetting this, leading to net debt of about ₹1.58b.

How Healthy Is Rollatainers's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rollatainers had liabilities of ₹2.46b due within 12 months and liabilities of ₹1.04b due beyond that. Offsetting these obligations, it had cash of ₹96.1m as well as receivables valued at ₹487.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.92b.

This deficit casts a shadow over the ₹550.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Rollatainers would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Rollatainers will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Rollatainers had a loss before interest and tax, and actually shrunk its revenue by 32%, to ₹941m. 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 ₹268m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost ₹298m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Rollatainers (2 don't sit too well with us) 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. 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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