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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 note that Rajshree Sugars and Chemicals Limited (NSE:RAJSREESUG) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Rajshree Sugars and Chemicals
What Is Rajshree Sugars and Chemicals's Debt?
The image below, which you can click on for greater detail, shows that Rajshree Sugars and Chemicals had debt of ₹3.90b at the end of March 2019, a reduction from ₹4.58b over a year. Net debt is about the same, since the it doesn't have much cash.
A Look At Rajshree Sugars and Chemicals's Liabilities
We can see from the most recent balance sheet that Rajshree Sugars and Chemicals had liabilities of ₹4.41b falling due within a year, and liabilities of ₹2.12b due beyond that. On the other hand, it had cash of ₹24.7m and ₹676.9m worth of receivables due within a year. So it has liabilities totalling ₹5.83b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹474.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, Rajshree Sugars and Chemicals would probably need a major re-capitalization if its creditors were to demand repayment. 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 Rajshree Sugars and Chemicals 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.