Is Dodla Dairy (NSE:DODLA) A Risky Investment?

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 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 Dodla Dairy Limited (NSE:DODLA) does use debt in its business. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dodla Dairy

How Much Debt Does Dodla Dairy Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Dodla Dairy had ₹462.4m of debt, an increase on ₹424.1m, over one year. However, its balance sheet shows it holds ₹6.19b in cash, so it actually has ₹5.73b net cash.

How Strong Is Dodla Dairy's Balance Sheet?

According to the last reported balance sheet, Dodla Dairy had liabilities of ₹2.93b due within 12 months, and liabilities of ₹777.1m due beyond 12 months. On the other hand, it had cash of ₹6.19b and ₹195.5m worth of receivables due within a year. So it actually has ₹2.68b more liquid assets than total liabilities.

This surplus suggests that Dodla Dairy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dodla Dairy boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Dodla Dairy grew its EBIT by 224% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dodla Dairy can strengthen its balance sheet over time. 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 Dodla Dairy 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. In the last three years, Dodla Dairy's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dodla Dairy has net cash of ₹5.73b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 224% over the last year. So we don't think Dodla Dairy's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Dodla Dairy insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.