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How Financially Strong Is Reliance Industries Limited (NSE:RELIANCE)?

There are a number of reasons that attract investors towards large-cap companies such as Reliance Industries Limited (NSEI:RELIANCE), with a market cap of IN₨5.14T. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the health of the financials determines whether the company continues to succeed. Today we will look at Reliance Industries’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into RELIANCE here. Check out our latest analysis for Reliance Industries

Does RELIANCE produce enough cash relative to debt?

Over the past year, RELIANCE has ramped up its debt from IN₨1.81T to IN₨1.97T , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at IN₨633.54B , ready to deploy into the business. Additionally, RELIANCE has generated IN₨495.50B in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 25.20%, meaning that RELIANCE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RELIANCE’s case, it is able to generate 0.25x cash from its debt capital.

Can RELIANCE pay its short-term liabilities?

With current liabilities at IN₨2.35T, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.62x, which is below the prudent industry ratio of 3x.

NSEI:RELIANCE Historical Debt Feb 8th 18
NSEI:RELIANCE Historical Debt Feb 8th 18

Is RELIANCE’s debt level acceptable?

With debt reaching 64.96% of equity, RELIANCE may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For RELIANCE, the ratio of 21.38x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as RELIANCE is a safe investment.

Next Steps:

Although RELIANCE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure RELIANCE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Reliance Industries to get a better picture of the stock by looking at:


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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