Is D. B (NSE:DBCORP) A Risky Investment?

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. As with many other companies D. B. Corp Limited (NSE:DBCORP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for D. B

What Is D. B's Debt?

The chart below, which you can click on for greater detail, shows that D. B had ₹2.69b in debt in September 2024; about the same as the year before. However, it does have ₹8.24b in cash offsetting this, leading to net cash of ₹5.54b.

How Healthy Is D. B's Balance Sheet?

According to the last reported balance sheet, D. B had liabilities of ₹5.33b due within 12 months, and liabilities of ₹3.14b due beyond 12 months. Offsetting these obligations, it had cash of ₹8.24b as well as receivables valued at ₹5.33b due within 12 months. So it actually has ₹5.09b more liquid assets than total liabilities.

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

Another good sign is that D. B has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if D. B can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While D. B 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, D. B actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that D. B has net cash of ₹5.54b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹5.6b, being 107% of its EBIT. So is D. B's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with D. B .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.