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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. 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 Rane Engine Valve Limited (NSE:RANEENGINE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 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 Rane Engine Valve
How Much Debt Does Rane Engine Valve Carry?
As you can see below, at the end of March 2019, Rane Engine Valve had ₹1.33b of debt, up from ₹947.0m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.
How Strong Is Rane Engine Valve's Balance Sheet?
According to the last reported balance sheet, Rane Engine Valve had liabilities of ₹1.68b due within 12 months, and liabilities of ₹478.5m due beyond 12 months. On the other hand, it had cash of ₹21.9m and ₹911.1m worth of receivables due within a year. So it has liabilities totalling ₹1.22b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of ₹1.90b, so it does suggest shareholders should keep an eye on Rane Engine Valve's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rane Engine Valve 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 Rane Engine Valve wasn't profitable at an EBIT level, but managed to grow its revenue by8.7%, to ₹4.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.