Health Check: How Prudently Does Delta Manufacturing (NSE:DELTAMAGNT) Use Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Delta Manufacturing Limited (NSE:DELTAMAGNT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Delta Manufacturing

What Is Delta Manufacturing's Debt?

As you can see below, at the end of March 2020, Delta Manufacturing had ₹572.5m of debt, up from ₹541.7m a year ago. Click the image for more detail. However, it also had ₹60.4m in cash, and so its net debt is ₹512.1m.

How Healthy Is Delta Manufacturing's Balance Sheet?

The latest balance sheet data shows that Delta Manufacturing had liabilities of ₹791.9m due within a year, and liabilities of ₹150.5m falling due after that. On the other hand, it had cash of ₹60.4m and ₹333.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹549.1m.

This deficit casts a shadow over the ₹226.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Delta Manufacturing would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Delta Manufacturing will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Delta Manufacturing wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to ₹1.0b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Delta Manufacturing managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₹105.7m. 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 had negative free cash flow of ₹36.3m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Delta Manufacturing (of which 4 are significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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