Health Check: How Prudently Does DCM Nouvelle (NSE:DCMNVL) Use Debt?

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.' 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 can see that DCM Nouvelle Limited (NSE:DCMNVL) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for DCM Nouvelle

What Is DCM Nouvelle's Net Debt?

As you can see below, at the end of March 2023, DCM Nouvelle had ₹2.65b of debt, up from ₹1.56b a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is DCM Nouvelle's Balance Sheet?

The latest balance sheet data shows that DCM Nouvelle had liabilities of ₹2.13b due within a year, and liabilities of ₹1.08b falling due after that. On the other hand, it had cash of ₹50.2m and ₹594.5m worth of receivables due within a year. So its liabilities total ₹2.56b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹2.73b, so it does suggest shareholders should keep an eye on DCM Nouvelle's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DCM Nouvelle 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 DCM Nouvelle had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₹8.6b. That's not what we would hope to see.

Caveat Emptor

While DCM Nouvelle's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹73m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹1.1b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with DCM Nouvelle (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.