Is Delta Manufacturing (NSE:DELTAMAGNT) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Delta Manufacturing Limited (NSE:DELTAMAGNT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Delta Manufacturing

What Is Delta Manufacturing's Debt?

The image below, which you can click on for greater detail, shows that Delta Manufacturing had debt of ₹539.8m at the end of March 2021, a reduction from ₹623.8m over a year. However, it does have ₹49.3m in cash offsetting this, leading to net debt of about ₹490.5m.

How Strong Is Delta Manufacturing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Delta Manufacturing had liabilities of ₹899.6m due within 12 months and liabilities of ₹98.0m due beyond that. On the other hand, it had cash of ₹49.3m and ₹345.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹603.1m.

When you consider that this deficiency exceeds the company's ₹522.5m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Delta Manufacturing's earnings that will influence how the balance sheet holds up in the future. 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 16%, to ₹1.0b. We would much prefer see growth.

Caveat Emptor

While Delta Manufacturing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹32m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹67m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Delta Manufacturing (2 shouldn't be ignored!) that you should be aware of before investing here.

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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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.
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