Ddev Plastiks Industries (NSE:DDEVPLSTIK) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ddev Plastiks Industries Limited (NSE:DDEVPLSTIK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ddev Plastiks Industries's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ddev Plastiks Industries had debt of ₹630.1m, up from ₹452.9m in one year. However, it does have ₹766.0m in cash offsetting this, leading to net cash of ₹135.9m.

A Look At Ddev Plastiks Industries' Liabilities

According to the last reported balance sheet, Ddev Plastiks Industries had liabilities of ₹3.04b due within 12 months, and liabilities of ₹265.5m due beyond 12 months. On the other hand, it had cash of ₹766.0m and ₹4.12b worth of receivables due within a year. So it actually has ₹1.57b more liquid assets than total liabilities.

This short term liquidity is a sign that Ddev Plastiks Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ddev Plastiks Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Ddev Plastiks Industries

And we also note warmly that Ddev Plastiks Industries grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ddev Plastiks Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ddev Plastiks Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Ddev Plastiks Industries recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ddev Plastiks Industries has net cash of ₹135.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 15% over the last year. So is Ddev Plastiks Industries's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Ddev Plastiks Industries that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.