We Think DEN Networks (NSE:DEN) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that DEN Networks Limited (NSE:DEN) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 DEN Networks

What Is DEN Networks's Debt?

You can click the graphic below for the historical numbers, but it shows that DEN Networks had ₹255.1m of debt in March 2024, down from ₹276.0m, one year before. However, its balance sheet shows it holds ₹26.5b in cash, so it actually has ₹26.3b net cash.

How Healthy Is DEN Networks' Balance Sheet?

We can see from the most recent balance sheet that DEN Networks had liabilities of ₹4.42b falling due within a year, and liabilities of ₹442.9m due beyond that. On the other hand, it had cash of ₹26.5b and ₹1.72b worth of receivables due within a year. So it actually has ₹23.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that DEN Networks' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, DEN Networks boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for DEN Networks if management cannot prevent a repeat of the 84% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DEN Networks 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. DEN Networks 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, DEN Networks actually produced more free cash flow than EBIT. 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 it is always sensible to investigate a company's debt, in this case DEN Networks has ₹26.3b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹326m, being 117% of its EBIT. So is DEN Networks's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for DEN Networks that you should be aware of.

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.