DCM Shriram (NSE:DCMSHRIRAM) Could Easily Take On More Debt

Warren Buffett famously said, '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 note that DCM Shriram Limited (NSE:DCMSHRIRAM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for DCM Shriram

How Much Debt Does DCM Shriram Carry?

The image below, which you can click on for greater detail, shows that at September 2021 DCM Shriram had debt of ₹13.4b, up from ₹11.7b in one year. However, it does have ₹21.1b in cash offsetting this, leading to net cash of ₹7.73b.

How Strong Is DCM Shriram's Balance Sheet?

According to the last reported balance sheet, DCM Shriram had liabilities of ₹19.0b due within 12 months, and liabilities of ₹12.7b due beyond 12 months. Offsetting these obligations, it had cash of ₹21.1b as well as receivables valued at ₹7.09b due within 12 months. So its liabilities total ₹3.57b more than the combination of its cash and short-term receivables.

Since publicly traded DCM Shriram shares are worth a total of ₹169.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, DCM Shriram boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that DCM Shriram has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DCM Shriram's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. DCM Shriram 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 most recent three years, DCM Shriram recorded free cash flow worth 65% 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.

Summing up

We could understand if investors are concerned about DCM Shriram's liabilities, but we can be reassured by the fact it has has net cash of ₹7.73b. And it impressed us with its EBIT growth of 35% over the last year. So is DCM Shriram'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. Be aware that DCM Shriram is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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