Does DOMS Industries (NSE:DOMS) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that DOMS Industries Limited (NSE:DOMS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DOMS Industries

What Is DOMS Industries's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 DOMS Industries had debt of ₹1.43b, up from ₹1.16b in one year. However, its balance sheet shows it holds ₹2.98b in cash, so it actually has ₹1.55b net cash.

How Healthy Is DOMS Industries' Balance Sheet?

The latest balance sheet data shows that DOMS Industries had liabilities of ₹2.77b due within a year, and liabilities of ₹1.58b falling due after that. Offsetting this, it had ₹2.98b in cash and ₹1.24b in receivables that were due within 12 months. So it has liabilities totalling ₹126.7m more than its cash and near-term receivables, combined.

Having regard to DOMS Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹168.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, DOMS Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, DOMS Industries grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine DOMS Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. DOMS Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, DOMS Industries reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that DOMS Industries has ₹1.55b in net cash. And it impressed us with its EBIT growth of 41% over the last year. So is DOMS Industries's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for DOMS Industries that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.