Does Dalmia Bharat Sugar and Industries (NSE:DALMIASUG) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Dalmia Bharat Sugar and Industries Limited (NSE:DALMIASUG) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dalmia Bharat Sugar and Industries

What Is Dalmia Bharat Sugar and Industries's Debt?

As you can see below, at the end of September 2022, Dalmia Bharat Sugar and Industries had ₹4.17b of debt, up from ₹3.62b a year ago. Click the image for more detail. However, it does have ₹5.73b in cash offsetting this, leading to net cash of ₹1.55b.

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

The latest balance sheet data shows that Dalmia Bharat Sugar and Industries had liabilities of ₹3.20b due within a year, and liabilities of ₹5.58b falling due after that. Offsetting this, it had ₹5.73b in cash and ₹1.01b in receivables that were due within 12 months. So its liabilities total ₹2.04b more than the combination of its cash and short-term receivables.

Since publicly traded Dalmia Bharat Sugar and Industries shares are worth a total of ₹25.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

On the other hand, Dalmia Bharat Sugar and Industries's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dalmia Bharat Sugar and 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, 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

We could understand if investors are concerned about Dalmia Bharat Sugar and Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹1.55b. So we are not troubled with Dalmia Bharat Sugar and Industries's debt use. 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. Be aware that Dalmia Bharat Sugar and Industries is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.