We Think Dhanuka Agritech (NSE:DHANUKA) Can Stay On Top Of Its Debt

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. We note that Dhanuka Agritech Limited (NSE:DHANUKA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dhanuka Agritech

How Much Debt Does Dhanuka Agritech Carry?

As you can see below, at the end of March 2023, Dhanuka Agritech had ₹335.2m of debt, up from ₹318.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹992.5m in cash, so it actually has ₹657.4m net cash.

How Healthy Is Dhanuka Agritech's Balance Sheet?

According to the last reported balance sheet, Dhanuka Agritech had liabilities of ₹2.98b due within 12 months, and liabilities of ₹460.6m due beyond 12 months. On the other hand, it had cash of ₹992.5m and ₹4.37b worth of receivables due within a year. So it actually has ₹1.92b 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. Succinctly put, Dhanuka Agritech boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Dhanuka Agritech has increased its EBIT by 8.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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. 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's free cash flow amounted to 20% of its EBIT, less 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 Dhanuka Agritech has net cash of ₹657.4m, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.8% over the last year. So we are not troubled with Dhanuka Agritech's debt use. 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.

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.

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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.