In This Article:
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Refex Industries Limited (NSE:REFEX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Refex Industries
What Is Refex Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that Refex Industries had ₹1.80m of debt in March 2019, down from ₹358.0m, one year before. But on the other hand it also has ₹118.6m in cash, leading to a ₹116.8m net cash position.
How Healthy Is Refex Industries's Balance Sheet?
The latest balance sheet data shows that Refex Industries had liabilities of ₹1.15b due within a year, and liabilities of ₹3.30m falling due after that. Offsetting these obligations, it had cash of ₹118.6m as well as receivables valued at ₹1.12b due within 12 months. So it can boast ₹78.3m more liquid assets than total liabilities.
This surplus suggests that Refex Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Refex Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Refex Industries grew its EBIT by 2890% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Refex Industries 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.