Is Keystone Realtors (NSE:RUSTOMJEE) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Keystone Realtors Limited (NSE:RUSTOMJEE) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Keystone Realtors

What Is Keystone Realtors's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Keystone Realtors had debt of ₹8.41b, up from ₹6.08b in one year. But on the other hand it also has ₹9.20b in cash, leading to a ₹787.6m net cash position.

A Look At Keystone Realtors' Liabilities

We can see from the most recent balance sheet that Keystone Realtors had liabilities of ₹31.9b falling due within a year, and liabilities of ₹6.59b due beyond that. Offsetting these obligations, it had cash of ₹9.20b as well as receivables valued at ₹2.65b due within 12 months. So it has liabilities totalling ₹26.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Keystone Realtors is worth ₹79.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Keystone Realtors boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Keystone Realtors grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Keystone Realtors can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Keystone Realtors has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Keystone Realtors actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Keystone Realtors does have more liabilities than liquid assets, it also has net cash of ₹787.6m. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in ₹1.1b. So is Keystone Realtors's debt a risk? It doesn't seem so to us. 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. Be aware that Keystone Realtors is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.