Is D. B (NSE:DBCORP) Using Too Much Debt?

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.' 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 can see that D. B. Corp Limited (NSE:DBCORP) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for D. B

What Is D. B's Debt?

The image below, which you can click on for greater detail, shows that D. B had debt of ₹221.3m at the end of September 2022, a reduction from ₹468.1m over a year. But on the other hand it also has ₹2.30b in cash, leading to a ₹2.08b net cash position.

How Strong Is D. B's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that D. B had liabilities of ₹4.69b due within 12 months and liabilities of ₹2.52b due beyond that. Offsetting these obligations, it had cash of ₹2.30b as well as receivables valued at ₹5.27b due within 12 months. So it actually has ₹369.2m more liquid assets than total liabilities.

Having regard to D. B's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹19.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, D. B boasts net cash, so it's fair to say it does not have a heavy debt load!

D. B's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. D. B 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. Over the last three years, D. B 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 investigate a company's debt, in this case D. B has ₹2.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹3.2b, being 136% 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. For example - D. B has 1 warning sign we think you should be aware of.

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. 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.