The Rise in disguise for Reliance: A debt-free company but with an interest to pay

Since we have thrown a lot of data and financial jargons at you, here are some of the takeaways which will help you understand the situation better.

Why Reliance became debt-free?

It was found that in the last ten years gross debt of Reliance increased by 420%, interest expenses grew by 691 % and the profits rose around  63%. These stats show that most of the income was going in paying the interest of loans (Long term and Short term) which reflected on their balance sheet.

This decision is driven emotionally more than financially. Every company of this size works in huge debt and turns it around every year making profits and paying dividends to the shareholders. The debt keeps on increasing without the profits going down. These numbers are psychologically disturbing to many who don’t really understand the business cycle of big MNCs.

Reliance going debt-free has helped its shareholders trust the company as there is no “debt” as if they were struggling to pay the loans and they would go bankrupt (Totally Fictional). To quantify this statement it should be noted that its shares soared over 8% intra-day after it declared itself net debt-free, nearly nine months ahead of schedule.

If it would be me I would call it an admiration move more than the financial tactic.

What’s so special in Reliance?

You may call Reliance the biggest Conglomerate of India in many aspects and hail the emergence of an Indian Business Tycoon as they have achieved the milestone of attracting huge investments even in the situation when everyone else started cutting costs and productions. They are special but the credit should go to the country they operate in.

There are many investors, but we will stress upon Facebook as they are the biggest and the most popular one.

Getting on the point, you must be happy to know that digital services sector including telecom has grown 352% in the last two years which was the major reason for Facebook becoming a family member of Reliance.

As it is said frequently “data is the new oil” Facebook is trying to grease their machinery with this oil which is present in abundance in India. Jio making the biggest breakthrough in the telecom Industry in past years becomes the obvious choice for anyone like Facebook.

Facebook is also looking to expand its base in India like Walmart, Amazon and Google have already done, they don’t want to miss out on more than 700 million smartphone subscribers of the fifth largest economy of the world.

Some opinions discouraging this decision

Reliance has played psychologically and emotionally which certainly drives the market of the country like India. People invest with emotions more than their understanding of financial ratios or number on the balance sheet. On this front, no one can take back the credit form Reliance after achieving this milestone.

But when we look at the business perspective it is always advised to diversify the portfolio to mitigate the risks of going bankrupt in the future. Reliance has parted ways with one of the most important financial instrument and is relying immensely on equity. Doing this not only increases the risk but also decreases the financial leverage they get from Long Term and Short Term debt.

These are some of the broad benefits of debt financing which can’t be ignored

• Debt lets you keep the ownership which is not the case with other financial instruments
• Your board members get the maximum voting rights and the control over the decisions
• Interest Payments Are Tax-Deductible which puts a positive impact on the balance sheet
• You don’t have to share the profits with the lenders

These benefits are enough to make you understand that all is not good in this decision of Reliance going net Debt-free.

Let’s Conclude

This was all you need to know about reliance being debt-free. It must be noted that this decision is highly appreciated by most of the people and Reliance only did what they promised a while back. Our task is to make you understand the white, the grey and the black of every scenario, rest depends on your insights and the comprehension of the subject matter.

It would have been better if they lowered the debt and maintained the combination of diverse financial instruments including debt. A lot has been said and done but the real boss is Reliance as they are capable of disrupting any market and coming out as a winner within no time.