We Think DIC India (NSE:DICIND) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, DIC India Limited (NSE:DICIND) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for DIC India

What Is DIC India's Net Debt?

The image below, which you can click on for greater detail, shows that DIC India had debt of ₹130.6m at the end of June 2020, a reduction from ₹475.0m over a year. However, it does have ₹1.00b in cash offsetting this, leading to net cash of ₹871.1m.

How Healthy Is DIC India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DIC India had liabilities of ₹1.68b due within 12 months and liabilities of ₹90.4m due beyond that. Offsetting these obligations, it had cash of ₹1.00b as well as receivables valued at ₹1.72b due within 12 months. So it can boast ₹952.4m more liquid assets than total liabilities.

This surplus suggests that DIC India is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, DIC India 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 DIC India has boosted its EBIT by 68%, 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 DIC India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While DIC India 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. Happily for any shareholders, DIC India actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DIC India has net cash of ₹871.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹526m, being 480% of its EBIT. The bottom line is that we do not find DIC India's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with DIC India .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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