Is Dhunseri Tea & Industries (NSE:DTIL) Weighed On By Its Debt Load?

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. Importantly, Dhunseri Tea & Industries Limited (NSE:DTIL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dhunseri Tea & Industries

What Is Dhunseri Tea & Industries's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Dhunseri Tea & Industries had debt of ₹1.12b, up from ₹724.8m in one year. However, it does have ₹1.45b in cash offsetting this, leading to net cash of ₹334.8m.

How Healthy Is Dhunseri Tea & Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dhunseri Tea & Industries had liabilities of ₹1.46b due within 12 months and liabilities of ₹1.48b due beyond that. Offsetting these obligations, it had cash of ₹1.45b as well as receivables valued at ₹269.6m due within 12 months. So it has liabilities totalling ₹1.22b more than its cash and near-term receivables, combined.

Dhunseri Tea & Industries has a market capitalization of ₹2.14b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Dhunseri Tea & Industries boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dhunseri Tea & Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Dhunseri Tea & Industries had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₹3.5b. That's not what we would hope to see.

So How Risky Is Dhunseri Tea & Industries?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Dhunseri Tea & Industries lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₹199m and booked a ₹1.3b accounting loss. Given it only has net cash of ₹334.8m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Dhunseri Tea & Industries (of which 2 are a bit unpleasant!) you should know about.

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.