Does Dalmia Bharat (NSE:DALBHARAT) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Dalmia Bharat Limited (NSE:DALBHARAT) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Dalmia Bharat

What Is Dalmia Bharat's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dalmia Bharat had ₹31.2b of debt in March 2022, down from ₹37.1b, one year before. However, its balance sheet shows it holds ₹45.4b in cash, so it actually has ₹14.3b net cash.

A Look At Dalmia Bharat's Liabilities

According to the last reported balance sheet, Dalmia Bharat had liabilities of ₹47.8b due within 12 months, and liabilities of ₹43.4b due beyond 12 months. On the other hand, it had cash of ₹45.4b and ₹12.8b worth of receivables due within a year. So its liabilities total ₹32.9b more than the combination of its cash and short-term receivables.

Of course, Dalmia Bharat has a market capitalization of ₹279.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Dalmia Bharat also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Dalmia Bharat's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dalmia Bharat can strengthen its balance sheet over time. 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. Dalmia Bharat 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, Dalmia Bharat recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

Although Dalmia Bharat's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹14.3b. And it impressed us with free cash flow of ₹1.7b, being 91% of its EBIT. So we are not troubled with Dalmia Bharat's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Dalmia Bharat 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.