Is Dodla Dairy (NSE:DODLA) Using Too Much 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.' 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 Dodla Dairy Limited (NSE:DODLA) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Dodla Dairy's Debt?

As you can see below, Dodla Dairy had ₹287.5m of debt at March 2025, down from ₹300.0m a year prior. However, it does have ₹7.21b in cash offsetting this, leading to net cash of ₹6.92b.

A Look At Dodla Dairy's Liabilities

The latest balance sheet data shows that Dodla Dairy had liabilities of ₹2.49b due within a year, and liabilities of ₹756.6m falling due after that. On the other hand, it had cash of ₹7.21b and ₹148.0m worth of receivables due within a year. So it can boast ₹4.11b 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. Simply put, the fact that Dodla Dairy has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Dodla Dairy

On top of that, Dodla Dairy grew its EBIT by 40% 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 ultimately the future profitability of the business will decide if Dodla Dairy can strengthen its balance sheet over time. 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. Dodla Dairy 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. Over the most recent three years, Dodla Dairy recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dodla Dairy has ₹6.92b in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't think Dodla Dairy's use of debt is risky. We'd be very excited to see if Dodla Dairy insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.