Dalmia Bharat Sugar and Industries (NSE:DALMIASUG) Has A Pretty 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.' 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. As with many other companies Dalmia Bharat Sugar and Industries Limited (NSE:DALMIASUG) makes use of debt. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dalmia Bharat Sugar and Industries

How Much Debt Does Dalmia Bharat Sugar and Industries Carry?

The image below, which you can click on for greater detail, shows that Dalmia Bharat Sugar and Industries had debt of ₹3.66b at the end of September 2020, a reduction from ₹7.47b over a year. But on the other hand it also has ₹4.62b in cash, leading to a ₹960.0m net cash position.

A Look At Dalmia Bharat Sugar and Industries' Liabilities

The latest balance sheet data shows that Dalmia Bharat Sugar and Industries had liabilities of ₹5.21b due within a year, and liabilities of ₹5.14b falling due after that. Offsetting these obligations, it had cash of ₹4.62b as well as receivables valued at ₹1.22b due within 12 months. So it has liabilities totalling ₹4.51b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Dalmia Bharat Sugar and Industries is worth ₹14.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Dalmia Bharat Sugar and Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Dalmia Bharat Sugar and Industries grew its EBIT by 36% 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 Dalmia Bharat Sugar and 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Dalmia Bharat Sugar and Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Dalmia Bharat Sugar and Industries recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Dalmia Bharat Sugar and Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹960.0m. And it impressed us with its EBIT growth of 36% over the last year. So we don't have any problem with Dalmia Bharat Sugar and Industries's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Dalmia Bharat Sugar and Industries you should be aware of.

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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