We Think Dhunseri Tea & Industries (NSE:DTIL) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Dhunseri Tea & Industries Limited (NSE:DTIL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dhunseri Tea & Industries

How Much Debt Does Dhunseri Tea & Industries Carry?

You can click the graphic below for the historical numbers, but it shows that Dhunseri Tea & Industries had ₹663.9m of debt in March 2021, down from ₹1.28b, one year before. But it also has ₹1.18b in cash to offset that, meaning it has ₹512.9m net cash.

A Look At Dhunseri Tea & Industries' Liabilities

According to the last reported balance sheet, Dhunseri Tea & Industries had liabilities of ₹1.10b due within 12 months, and liabilities of ₹1.57b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.18b as well as receivables valued at ₹203.6m due within 12 months. So it has liabilities totalling ₹1.29b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Dhunseri Tea & Industries is worth ₹3.20b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Dhunseri Tea & Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Dhunseri Tea & Industries's EBIT launched higher than Elon Musk, gaining a whopping 2,351% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dhunseri Tea & Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 4.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While Dhunseri Tea & Industries does have more liabilities than liquid assets, it also has net cash of ₹512.9m. And we liked the look of last year's 2,351% year-on-year EBIT growth. So we are not troubled with Dhunseri Tea & Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 5 warning signs we've spotted with Dhunseri Tea & Industries .

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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