Dalmia Bharat Sugar and Industries (NSE:DALMIASUG) Takes On Some Risk With Its Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dalmia Bharat Sugar and Industries Limited (NSE:DALMIASUG) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dalmia Bharat Sugar and Industries

How Much Debt Does Dalmia Bharat Sugar and Industries Carry?

As you can see below, Dalmia Bharat Sugar and Industries had ₹3.63b of debt at September 2024, down from ₹4.19b a year prior. But it also has ₹3.71b in cash to offset that, meaning it has ₹78.4m net cash.

How Healthy Is Dalmia Bharat Sugar and Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dalmia Bharat Sugar and Industries had liabilities of ₹3.70b due within 12 months and liabilities of ₹5.70b due beyond that. On the other hand, it had cash of ₹3.71b and ₹1.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.14b.

Given Dalmia Bharat Sugar and Industries has a market capitalization of ₹27.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Dalmia Bharat Sugar and Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Dalmia Bharat Sugar and Industries's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Considering the last three years, Dalmia Bharat Sugar and Industries actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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 ₹78.4m. So while Dalmia Bharat Sugar and Industries does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dalmia Bharat Sugar and Industries you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.