Does Dhunseri Tea & Industries (NSE:DTIL) Have A Healthy Balance Sheet?

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 note that Dhunseri Tea & Industries Limited (NSE:DTIL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dhunseri Tea & Industries

What Is Dhunseri Tea & Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Dhunseri Tea & Industries had ₹1.15b of debt, an increase on ₹960.3m, over one year. However, it does have ₹1.02b in cash offsetting this, leading to net debt of about ₹125.8m.

How Strong Is Dhunseri Tea & Industries's Balance Sheet?

According to the last reported balance sheet, Dhunseri Tea & Industries had liabilities of ₹1.34b due within 12 months, and liabilities of ₹1.70b due beyond 12 months. Offsetting this, it had ₹1.02b in cash and ₹313.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.7b.

When you consider that this deficiency exceeds the company's ₹1.39b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dhunseri Tea & 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.

In the last year Dhunseri Tea & Industries had a loss before interest and tax, and actually shrunk its revenue by 6.7%, to ₹3.0b. That's not what we would hope to see.

Caveat Emptor

Importantly, Dhunseri Tea & Industries had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹9.4m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹360.3m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for Dhunseri Tea & Industries you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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