Dishman Carbogen Amcis (NSE:DCAL) Has A Somewhat Strained Balance Sheet

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. We can see that Dishman Carbogen Amcis Limited (NSE:DCAL) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Dishman Carbogen Amcis

What Is Dishman Carbogen Amcis's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dishman Carbogen Amcis had ₹9.12b of debt in September 2020, down from ₹11.4b, one year before. However, it also had ₹3.26b in cash, and so its net debt is ₹5.86b.

A Look At Dishman Carbogen Amcis' Liabilities

We can see from the most recent balance sheet that Dishman Carbogen Amcis had liabilities of ₹14.9b falling due within a year, and liabilities of ₹8.84b due beyond that. On the other hand, it had cash of ₹3.26b and ₹4.73b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹15.7b.

This is a mountain of leverage relative to its market capitalization of ₹19.6b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Dishman Carbogen Amcis's net debt is sitting at a very reasonable 2.1 times its EBITDA, while its EBIT covered its interest expense just 6.0 times last year. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. Importantly, Dishman Carbogen Amcis's EBIT fell a jaw-dropping 69% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dishman Carbogen Amcis 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Dishman Carbogen Amcis recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Mulling over Dishman Carbogen Amcis's attempt at (not) growing its EBIT, we're certainly not enthusiastic. But at least its interest cover is not so bad. Overall, we think it's fair to say that Dishman Carbogen Amcis has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Dishman Carbogen Amcis , and understanding them should be part of your investment process.

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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