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.’ 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 Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Ratnamani Metals & Tubes
What Is Ratnamani Metals & Tubes’s Net Debt?
The image below, which you can click on for greater detail, shows that Ratnamani Metals & Tubes had debt of ₹1.29b at the end of September 2022, a reduction from ₹1.72b over a year. But it also has ₹2.01b in cash to offset that, meaning it has ₹727.1m net cash.
A Look At Ratnamani Metals & Tubes’ Liabilities
According to the last reported balance sheet, Ratnamani Metals & Tubes had liabilities of ₹5.68b due within 12 months, and liabilities of ₹1.28b due beyond 12 months. Offsetting this, it had ₹2.01b in cash and ₹6.14b in receivables that were due within 12 months. So it can boast ₹1.19b more liquid assets than total liabilities.
Having regard to Ratnamani Metals & Tubes’ size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the ₹155.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ratnamani Metals & Tubes has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Ratnamani Metals & Tubes grew its EBIT by 34% 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 you can’t view debt in total isolation; since Ratnamani Metals & Tubes will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ratnamani Metals & Tubes 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. Over the last three years, Ratnamani Metals & Tubes reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
While it is always sensible to investigate a company’s debt, in this case Ratnamani Metals & Tubes has ₹727.1m in net cash and a decent-looking balance sheet. And we liked the look of last year’s 34% year-on-year EBIT growth. So we don’t think Ratnamani Metals & Tubes’s use of debt is 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. These risks can be hard to spot. Every company has them, and we’ve spotted 2 warning signs for Ratnamani Metals & Tubes (of which 1 is a bit unpleasant!) 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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Find out whether Ratnamani Metals & Tubes is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
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