Is Digicontent (NSE:DGCONTENT) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Digicontent Limited (NSE:DGCONTENT) makes use of debt. 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Digicontent

What Is Digicontent's Net Debt?

As you can see below, Digicontent had ₹677.4m of debt at September 2020, down from ₹1.18b a year prior. On the flip side, it has ₹184.6m in cash leading to net debt of about ₹492.8m.

How Healthy Is Digicontent's Balance Sheet?

The latest balance sheet data shows that Digicontent had liabilities of ₹563.2m due within a year, and liabilities of ₹1.04b falling due after that. On the other hand, it had cash of ₹184.6m and ₹376.2m worth of receivables due within a year. So it has liabilities totalling ₹1.05b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹756.4m, we think shareholders really should watch Digicontent's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Digicontent'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.

Over 12 months, Digicontent made a loss at the EBIT level, and saw its revenue drop to ₹2.4b, which is a fall of 10%. That's not what we would hope to see.

Caveat Emptor

Not only did Digicontent's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹51m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹409m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Be aware that Digicontent is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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