DOMS Industries (NSE:DOMS) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that DOMS Industries Limited (NSE:DOMS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for DOMS Industries

What Is DOMS Industries's Net Debt?

As you can see below, at the end of March 2024, DOMS Industries had ₹1.16b of debt, up from ₹1.00b a year ago. Click the image for more detail. But on the other hand it also has ₹3.06b in cash, leading to a ₹1.90b net cash position.

How Strong Is DOMS Industries' Balance Sheet?

We can see from the most recent balance sheet that DOMS Industries had liabilities of ₹2.06b falling due within a year, and liabilities of ₹1.42b due beyond that. Offsetting these obligations, it had cash of ₹3.06b as well as receivables valued at ₹653.7m due within 12 months. So it actually has ₹235.0m more liquid assets than total liabilities.

This state of affairs indicates that DOMS Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹128.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that DOMS Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, DOMS Industries grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if DOMS Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, DOMS Industries recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that DOMS Industries has net cash of ₹1.90b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% 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. To that end, you should be aware of the 1 warning sign we've spotted with DOMS Industries .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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