Does Dhunseri Tea & Industries (NSE:DTIL) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Dhunseri Tea & Industries Limited (NSE:DTIL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dhunseri Tea & Industries

What Is Dhunseri Tea & Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dhunseri Tea & Industries had ₹1.06b of debt in September 2021, down from ₹1.17b, one year before. But it also has ₹1.41b in cash to offset that, meaning it has ₹358.8m net cash.

How Healthy Is Dhunseri Tea & Industries' Balance Sheet?

According to the last reported balance sheet, Dhunseri Tea & Industries had liabilities of ₹1.48b due within 12 months, and liabilities of ₹1.36b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.41b as well as receivables valued at ₹502.1m due within 12 months. So its liabilities total ₹924.5m more than the combination of its cash and short-term receivables.

Dhunseri Tea & Industries has a market capitalization of ₹2.96b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Dhunseri Tea & Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Dhunseri Tea & Industries saw its EBIT decline by 8.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is Dhunseri Tea & Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Dhunseri Tea & 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. In the last three years, Dhunseri Tea & Industries created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

Although Dhunseri Tea & Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹358.8m. So we don't have any problem with Dhunseri Tea & Industries'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. For instance, we've identified 3 warning signs for Dhunseri Tea & Industries that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.