These 4 Measures Indicate That Dhunseri Ventures (NSE:DVL) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Dhunseri Ventures Limited (NSE:DVL) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dhunseri Ventures

What Is Dhunseri Ventures's Debt?

As you can see below, Dhunseri Ventures had ₹557.0m of debt at September 2020, down from ₹748.4m a year prior. However, its balance sheet shows it holds ₹1.91b in cash, so it actually has ₹1.35b net cash.

How Healthy Is Dhunseri Ventures's Balance Sheet?

We can see from the most recent balance sheet that Dhunseri Ventures had liabilities of ₹430.3m falling due within a year, and liabilities of ₹2.19b due beyond that. On the other hand, it had cash of ₹1.91b and ₹529.8m worth of receivables due within a year. So its liabilities total ₹179.4m more than the combination of its cash and short-term receivables.

Given Dhunseri Ventures has a market capitalization of ₹2.66b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Dhunseri Ventures boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Dhunseri Ventures's load is not too heavy, because its EBIT was down 26% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dhunseri Ventures's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dhunseri Ventures has ₹1.35b in net cash. And it impressed us with free cash flow of -₹252m, being 535% of its EBIT. So we don't have any problem with Dhunseri Ventures's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Dhunseri Ventures (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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