These 4 Measures Indicate That Dodla Dairy (NSE:DODLA) Is Using Debt Reasonably Well

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. 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.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dodla Dairy

What Is Dodla Dairy's Debt?

As you can see below, at the end of September 2023, Dodla Dairy had ₹265.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₹3.22b in cash, leading to a ₹2.95b net cash position.

How Strong Is Dodla Dairy's Balance Sheet?

We can see from the most recent balance sheet that Dodla Dairy had liabilities of ₹2.48b falling due within a year, and liabilities of ₹732.1m due beyond that. On the other hand, it had cash of ₹3.22b and ₹88.6m worth of receivables due within a year. So it can boast ₹92.7m more liquid assets than total liabilities.

This state of affairs indicates that Dodla Dairy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹50.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Dodla Dairy boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Dodla Dairy grew its EBIT by 6.7% in the last year, making that debt load look even more manageable. 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 Dodla Dairy'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dodla Dairy has ₹2.95b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.7% over the last year. So we don't have any problem with Dodla Dairy's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dodla Dairy you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.