Is Shree Rama Multi-Tech (NSE:SHREERAMA) A Risky Investment?

Warren Buffett famously said, '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 Shree Rama Multi-Tech Limited (NSE:SHREERAMA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shree Rama Multi-Tech

What Is Shree Rama Multi-Tech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Shree Rama Multi-Tech had ₹792.6m of debt, an increase on ₹695.9m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Shree Rama Multi-Tech's Balance Sheet?

The latest balance sheet data shows that Shree Rama Multi-Tech had liabilities of ₹295.4m due within a year, and liabilities of ₹714.5m falling due after that. On the other hand, it had cash of ₹1.27m and ₹279.2m worth of receivables due within a year. So it has liabilities totalling ₹729.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹774.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shree Rama Multi-Tech 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 Shree Rama Multi-Tech wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to ₹1.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Shree Rama Multi-Tech had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹47m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹112m of cash over the last year. So in short it's a really risky stock. 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 example Shree Rama Multi-Tech has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.