In This Article:
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Ratnamani Metals & Tubes Limited (NSE:RATNAMANI) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
View our latest analysis for Ratnamani Metals & Tubes
What Is Ratnamani Metals & Tubes's Debt?
The image below, which you can click on for greater detail, shows that Ratnamani Metals & Tubes had debt of ₹654.0m at the end of March 2019, a reduction from ₹789.1m over a year. However, its balance sheet shows it holds ₹3.52b in cash, so it actually has ₹2.86b net cash.
How Strong Is Ratnamani Metals & Tubes's Balance Sheet?
We can see from the most recent balance sheet that Ratnamani Metals & Tubes had liabilities of ₹4.87b falling due within a year, and liabilities of ₹432.2m due beyond that. On the other hand, it had cash of ₹3.52b and ₹4.62b worth of receivables due within a year. So it can boast ₹2.84b more liquid assets than total liabilities.
This surplus suggests that Ratnamani Metals & Tubes has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ratnamani Metals & Tubes boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Ratnamani Metals & Tubes grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ratnamani Metals & Tubes's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.