Delta Manufacturing (NSE:DELTAMAGNT) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Delta Manufacturing Limited (NSE:DELTAMAGNT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

See our latest analysis for Delta Manufacturing

What Is Delta Manufacturing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Delta Manufacturing had ₹400.5m of debt in March 2023, down from ₹468.5m, one year before. However, because it has a cash reserve of ₹69.4m, its net debt is less, at about ₹331.1m.

A Look At Delta Manufacturing's Liabilities

The latest balance sheet data shows that Delta Manufacturing had liabilities of ₹573.1m due within a year, and liabilities of ₹104.9m falling due after that. Offsetting this, it had ₹69.4m in cash and ₹209.7m in receivables that were due within 12 months. So it has liabilities totalling ₹398.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Delta Manufacturing has a market capitalization of ₹942.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to ₹796m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Delta Manufacturing produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹107m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹48m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Delta Manufacturing (of which 2 are a bit concerning!) 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.