DCM Shriram (NSE:DCMSHRIRAM) Has A Rock Solid Balance Sheet

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, DCM Shriram Limited (NSE:DCMSHRIRAM) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DCM Shriram

How Much Debt Does DCM Shriram Carry?

As you can see below, at the end of September 2022, DCM Shriram had ₹14.7b of debt, up from ₹13.4b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹15.3b in cash, so it actually has ₹591.7m net cash.

How Strong Is DCM Shriram's Balance Sheet?

We can see from the most recent balance sheet that DCM Shriram had liabilities of ₹22.1b falling due within a year, and liabilities of ₹17.5b due beyond that. Offsetting these obligations, it had cash of ₹15.3b as well as receivables valued at ₹12.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹11.5b.

Since publicly traded DCM Shriram shares are worth a total of ₹134.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DCM Shriram will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, DCM Shriram's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that DCM Shriram has ₹591.7m in net cash. And we liked the look of last year's 52% year-on-year EBIT growth. So we don't think DCM Shriram's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for DCM Shriram (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.