Is RailTel Corporation of India (NSE:RAILTEL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that RailTel Corporation of India Limited (NSE:RAILTEL) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. 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.

What Is RailTel Corporation of India's Net Debt?

As you can see below, RailTel Corporation of India had ₹445.4m of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹7.98b in cash offsetting this, leading to net cash of ₹7.53b.

How Healthy Is RailTel Corporation of India's Balance Sheet?

The latest balance sheet data shows that RailTel Corporation of India had liabilities of ₹29.4b due within a year, and liabilities of ₹2.22b falling due after that. Offsetting this, it had ₹7.98b in cash and ₹26.8b in receivables that were due within 12 months. So it actually has ₹3.19b more liquid assets than total liabilities.

This short term liquidity is a sign that RailTel Corporation of India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that RailTel Corporation of India has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for RailTel Corporation of India

Also good is that RailTel Corporation of India grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine RailTel Corporation of India's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While RailTel Corporation of India 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. In the last three years, RailTel Corporation of India created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case RailTel Corporation of India has ₹7.53b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 15% in the last twelve months. So we are not troubled with RailTel Corporation of India's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that RailTel Corporation of India is showing 1 warning sign in our investment analysis , 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.