Does Dhanuka Agritech (NSE:DHANUKA) 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.' 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. Importantly, Dhanuka Agritech Limited (NSE:DHANUKA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dhanuka Agritech

How Much Debt Does Dhanuka Agritech Carry?

You can click the graphic below for the historical numbers, but it shows that Dhanuka Agritech had ₹314.9m of debt in September 2023, down from ₹402.1m, one year before. However, it does have ₹609.8m in cash offsetting this, leading to net cash of ₹294.9m.

How Healthy Is Dhanuka Agritech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dhanuka Agritech had liabilities of ₹3.70b due within 12 months and liabilities of ₹451.5m due beyond that. Offsetting this, it had ₹609.8m in cash and ₹5.45b in receivables that were due within 12 months. So it can boast ₹1.91b more liquid assets than total liabilities.

This surplus suggests that Dhanuka Agritech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dhanuka Agritech boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Dhanuka Agritech grew its EBIT by 20% 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 ultimately the future profitability of the business will decide if Dhanuka Agritech 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, a company can only pay off debt with cold hard cash, not accounting profits. Dhanuka Agritech 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, Dhanuka Agritech created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dhanuka Agritech has net cash of ₹294.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't think Dhanuka Agritech's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Dhanuka Agritech that you should be aware of before investing here.

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.