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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Ruchi Infrastructure Limited (NSE:RUCHINFRA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Ruchi Infrastructure
How Much Debt Does Ruchi Infrastructure Carry?
The image below, which you can click on for greater detail, shows that Ruchi Infrastructure had debt of ₹2.08b at the end of March 2019, a reduction from ₹2.28b over a year. Net debt is about the same, since the it doesn't have much cash.
How Strong Is Ruchi Infrastructure's Balance Sheet?
We can see from the most recent balance sheet that Ruchi Infrastructure had liabilities of ₹1.07b falling due within a year, and liabilities of ₹1.94b due beyond that. Offsetting these obligations, it had cash of ₹29.8m as well as receivables valued at ₹807.5m due within 12 months. So its liabilities total ₹2.18b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₹369.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Ruchi Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ruchi Infrastructure's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Ruchi Infrastructure made a loss at the EBIT level, and saw its revenue drop to ₹561m, which is a fall of 26%. To be frank that doesn't bode well.