Delta (NSE:DELTACORP) Could Easily Take On More 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.' 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. Importantly, Delta Corp Limited (NSE:DELTACORP) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Delta

What Is Delta's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Delta had ₹675.1m of debt, an increase on ₹453.3m, over one year. However, it does have ₹6.75b in cash offsetting this, leading to net cash of ₹6.07b.

How Strong Is Delta's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Delta had liabilities of ₹2.23b due within 12 months and liabilities of ₹1.03b due beyond that. On the other hand, it had cash of ₹6.75b and ₹511.8m worth of receivables due within a year. So it can boast ₹4.00b more liquid assets than total liabilities.

This short term liquidity is a sign that Delta could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Delta boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Delta has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Delta's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Delta 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 two years, Delta recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Delta has ₹6.07b in net cash and a decent-looking balance sheet. And we liked the look of last year's 61% year-on-year EBIT growth. So we don't think Delta's use of debt is 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. We've identified 2 warning signs with Delta (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.