Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that D B Realty Limited (NSE:DBREALTY) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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, 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.
What Is D B Realty's Debt?
As you can see below, D B Realty had ₹18.6b of debt at March 2021, down from ₹21.9b a year prior. However, it also had ₹2.43b in cash, and so its net debt is ₹16.1b.
A Look At D B Realty's Liabilities
We can see from the most recent balance sheet that D B Realty had liabilities of ₹45.2b falling due within a year, and liabilities of ₹16.0b due beyond that. Offsetting this, it had ₹2.43b in cash and ₹12.6b in receivables that were due within 12 months. So it has liabilities totalling ₹46.2b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹6.86b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, D B Realty would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is D B Realty'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, D B Realty made a loss at the EBIT level, and saw its revenue drop to ₹246m, which is a fall of 86%. That makes us nervous, to say the least.
Not only did D B Realty's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹900m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹1.7b in the last year. So we're not very excited about owning this stock. Its too risky for 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. Be aware that D B Realty is showing 4 warning signs in our investment analysis , and 1 of those is significant...
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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