These 4 Measures Indicate That Dwarikesh Sugar Industries (NSE:DWARKESH) 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. Importantly, Dwarikesh Sugar Industries Limited (NSE:DWARKESH) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dwarikesh Sugar Industries

What Is Dwarikesh Sugar Industries's Net Debt?

As you can see below, Dwarikesh Sugar Industries had ₹2.19b of debt at September 2024, down from ₹2.68b a year prior. However, because it has a cash reserve of ₹2.16b, its net debt is less, at about ₹22.5m.

A Look At Dwarikesh Sugar Industries' Liabilities

The latest balance sheet data shows that Dwarikesh Sugar Industries had liabilities of ₹1.36b due within a year, and liabilities of ₹1.64b falling due after that. Offsetting these obligations, it had cash of ₹2.16b as well as receivables valued at ₹10.0m due within 12 months. So its liabilities total ₹831.6m more than the combination of its cash and short-term receivables.

Since publicly traded Dwarikesh Sugar Industries shares are worth a total of ₹8.87b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Dwarikesh Sugar Industries has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt at just 0.029 times EBITDA, it seems Dwarikesh Sugar Industries only uses a little bit of leverage. Although with EBIT only covering interest expenses 5.0 times over, the company is truly paying for borrowing. Importantly, Dwarikesh Sugar Industries's EBIT fell a jaw-dropping 85% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Dwarikesh Sugar Industries'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Dwarikesh Sugar Industries recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Based on what we've seen Dwarikesh Sugar Industries is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its net debt to EBITDA. When we consider all the elements mentioned above, it seems to us that Dwarikesh Sugar Industries is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. Even though Dwarikesh Sugar Industries lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.