These 4 Measures Indicate That Dwarikesh Sugar Industries (NSE:DWARKESH) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Dwarikesh Sugar Industries Limited (NSE:DWARKESH) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dwarikesh Sugar Industries

How Much Debt Does Dwarikesh Sugar Industries Carry?

The image below, which you can click on for greater detail, shows that Dwarikesh Sugar Industries had debt of ₹2.68b at the end of September 2023, a reduction from ₹3.12b over a year. But it also has ₹3.40b in cash to offset that, meaning it has ₹720.7m net cash.

How Healthy Is Dwarikesh Sugar Industries' Balance Sheet?

The latest balance sheet data shows that Dwarikesh Sugar Industries had liabilities of ₹1.38b due within a year, and liabilities of ₹2.14b falling due after that. On the other hand, it had cash of ₹3.40b and ₹259.1m worth of receivables due within a year. So it can boast ₹136.2m more liquid assets than total liabilities.

This state of affairs indicates that Dwarikesh Sugar Industries' 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 ₹13.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Dwarikesh Sugar 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 Dwarikesh Sugar Industries saw its EBIT decline by 8.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dwarikesh Sugar Industries 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. Dwarikesh Sugar Industries 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 last three years, Dwarikesh Sugar Industries actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dwarikesh Sugar Industries has net cash of ₹720.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹463m, being 106% of its EBIT. So is Dwarikesh Sugar Industries's debt a risk? It doesn't seem so to us. 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. For example - Dwarikesh Sugar Industries has 1 warning sign we think you should be aware of.

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.