Is Ducol Organics And Colours (NSE:DUCOL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Ducol Organics And Colours Limited (NSE:DUCOL) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ducol Organics And Colours

What Is Ducol Organics And Colours's Debt?

The image below, which you can click on for greater detail, shows that Ducol Organics And Colours had debt of ₹169.6m at the end of September 2024, a reduction from ₹178.6m over a year. But on the other hand it also has ₹269.7m in cash, leading to a ₹100.1m net cash position.

How Healthy Is Ducol Organics And Colours' Balance Sheet?

We can see from the most recent balance sheet that Ducol Organics And Colours had liabilities of ₹339.7m falling due within a year, and liabilities of ₹65.7m due beyond that. On the other hand, it had cash of ₹269.7m and ₹156.2m worth of receivables due within a year. So it can boast ₹20.5m more liquid assets than total liabilities.

This state of affairs indicates that Ducol Organics And Colours' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹1.96b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Ducol Organics And Colours boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Ducol Organics And Colours has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ducol Organics And Colours's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ducol Organics And Colours 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, Ducol Organics And Colours created free cash flow amounting to 10% 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 Ducol Organics And Colours has net cash of ₹100.1m, as well as more liquid assets than liabilities. So we don't have any problem with Ducol Organics And Colours's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Ducol Organics And Colours .

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.