Is Dhanuka Agritech (NSE:DHANUKA) Using Too Much Debt?

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.' 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. We can see that Dhanuka Agritech Limited (NSE:DHANUKA) does use debt in its business. But should shareholders be worried about its use of debt?

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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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Dhanuka Agritech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Dhanuka Agritech had ₹421.8m of debt, an increase on ₹4.68m, over one year. But on the other hand it also has ₹1.24b in cash, leading to a ₹819.8m net cash position.

How Strong Is Dhanuka Agritech's Balance Sheet?

We can see from the most recent balance sheet that Dhanuka Agritech had liabilities of ₹3.49b falling due within a year, and liabilities of ₹488.1m due beyond that. Offsetting this, it had ₹1.24b in cash and ₹5.44b in receivables that were due within 12 months. So it can boast ₹2.71b more liquid assets than total liabilities.

This short term liquidity is a sign that Dhanuka Agritech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Dhanuka Agritech has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Dhanuka Agritech

Also positive, Dhanuka Agritech grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dhanuka Agritech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dhanuka Agritech 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. In the last three years, Dhanuka Agritech created free cash flow amounting to 14% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dhanuka Agritech has net cash of ₹819.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Dhanuka Agritech's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Dhanuka Agritech, you may well want to click here to check an interactive graph of its earnings per share history.

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.