RailTel Corporation of India (NSE:RAILTEL) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, RailTel Corporation of India Limited (NSE:RAILTEL) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for RailTel Corporation of India

How Much Debt Does RailTel Corporation of India Carry?

As you can see below, at the end of March 2024, RailTel Corporation of India had ₹456.2m of debt, up from ₹417.9m a year ago. Click the image for more detail. However, it does have ₹6.44b in cash offsetting this, leading to net cash of ₹5.98b.

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

According to the last reported balance sheet, RailTel Corporation of India had liabilities of ₹20.9b due within 12 months, and liabilities of ₹1.28b due beyond 12 months. On the other hand, it had cash of ₹6.44b and ₹16.8b worth of receivables due within a year. So it can boast ₹1.00b more liquid assets than total liabilities.

Having regard to RailTel Corporation of India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹161.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, RailTel Corporation of India boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, RailTel Corporation of India grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if RailTel Corporation of India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. RailTel Corporation of India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, RailTel Corporation of India produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that RailTel Corporation of India has net cash of ₹5.98b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 40% over the last year. So we don't think RailTel Corporation of India's use of debt is 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. Be aware that RailTel Corporation of India is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.