Would RattanIndia Enterprises (NSE:RTNINDIA) 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.' 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 note that RattanIndia Enterprises Limited (NSE:RTNINDIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for RattanIndia Enterprises

What Is RattanIndia Enterprises's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 RattanIndia Enterprises had debt of ₹200.0m, up from none in one year. However, it does have ₹40.1m in cash offsetting this, leading to net debt of about ₹159.9m.

A Look At RattanIndia Enterprises' Liabilities

The latest balance sheet data shows that RattanIndia Enterprises had liabilities of ₹207.8m due within a year, and liabilities of ₹2.59m falling due after that. Offsetting this, it had ₹40.1m in cash and ₹8.30m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹162.0m.

This state of affairs indicates that RattanIndia Enterprises' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹66.6b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, RattanIndia Enterprises has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RattanIndia Enterprises 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 RattanIndia Enterprises managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

Caveat Emptor

Importantly, RattanIndia Enterprises had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹30m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹110m. So we do think this stock is quite risky. 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. For example RattanIndia Enterprises has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.