Would Shree Rama Multi-Tech (NSE:SHREERAMA) Be Better Off With Less 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.' 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. Importantly, Shree Rama Multi-Tech Limited (NSE:SHREERAMA) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shree Rama Multi-Tech

How Much Debt Does Shree Rama Multi-Tech Carry?

The chart below, which you can click on for greater detail, shows that Shree Rama Multi-Tech had ₹753.1m in debt in September 2021; about the same as the year before. However, it also had ₹25.0m in cash, and so its net debt is ₹728.1m.

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

We can see from the most recent balance sheet that Shree Rama Multi-Tech had liabilities of ₹251.1m falling due within a year, and liabilities of ₹713.4m due beyond that. On the other hand, it had cash of ₹25.0m and ₹291.1m worth of receivables due within a year. So it has liabilities totalling ₹648.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹1.05b, so it does suggest shareholders should keep an eye on Shree Rama Multi-Tech's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shree Rama Multi-Tech's earnings that will influence how the balance sheet holds up in the future. 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 20%, 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. To be specific the EBIT loss came in at ₹2.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹48m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shree Rama Multi-Tech (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.