Here's Why Dalmia Bharat Sugar and Industries (NSE:DALMIASUG) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dalmia Bharat Sugar and Industries

What Is Dalmia Bharat Sugar and Industries's Debt?

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 on the other hand it also has ₹3.71b in cash, leading to a ₹78.4m net cash position.

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

According to the last reported balance sheet, Dalmia Bharat Sugar and Industries had liabilities of ₹3.70b due within 12 months, and liabilities of ₹5.70b due beyond 12 months. On the other hand, it had cash of ₹3.71b and ₹1.56b worth of receivables due within a year. So it has liabilities totalling ₹4.14b more than its cash and near-term receivables, combined.

Of course, Dalmia Bharat Sugar and Industries has a market capitalization of ₹35.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On the other hand, Dalmia Bharat Sugar and Industries's EBIT dived 19%, 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Dalmia Bharat Sugar and Industries recorded negative free cash flow, in total. 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

While Dalmia Bharat Sugar and Industries does have more liabilities than liquid assets, it also has net cash of ₹78.4m. So although we see some areas for improvement, we're not too worried about Dalmia Bharat Sugar and Industries's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Dalmia Bharat Sugar and Industries that you should be aware of before investing here.

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.