Is Dalmia Bharat (NSE:DALBHARAT) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Dalmia Bharat Limited (NSE:DALBHARAT) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out 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 ₹30.9b of debt in September 2021, down from ₹43.1b, one year before. But on the other hand it also has ₹49.8b in cash, leading to a ₹18.9b net cash position.

How Strong Is Dalmia Bharat's Balance Sheet?

According to the last reported balance sheet, Dalmia Bharat had liabilities of ₹48.3b due within 12 months, and liabilities of ₹37.8b due beyond 12 months. On the other hand, it had cash of ₹49.8b and ₹5.79b worth of receivables due within a year. So its liabilities total ₹30.6b more than the combination of its cash and short-term receivables.

Of course, Dalmia Bharat has a market capitalization of ₹350.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 top of that, Dalmia Bharat grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Dalmia Bharat's liabilities, but we can be reassured by the fact it has has net cash of ₹18.9b. And it impressed us with free cash flow of ₹13b, being 102% of its EBIT. So we don't think Dalmia Bharat's use of debt is risky. 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 instance, we've identified 1 warning sign for Dalmia Bharat that you should be aware of.

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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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.