Here's Why Ducon Infratechnolgies (NSE:DUCON) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Ducon Infratechnolgies Limited (NSE:DUCON) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ducon Infratechnolgies

How Much Debt Does Ducon Infratechnolgies Carry?

The chart below, which you can click on for greater detail, shows that Ducon Infratechnolgies had ₹651.5m in debt in September 2021; about the same as the year before. However, it also had ₹74.0m in cash, and so its net debt is ₹577.5m.

How Healthy Is Ducon Infratechnolgies' Balance Sheet?

The latest balance sheet data shows that Ducon Infratechnolgies had liabilities of ₹1.40b due within a year, and liabilities of ₹79.1m falling due after that. Offsetting this, it had ₹74.0m in cash and ₹2.69b in receivables that were due within 12 months. So it actually has ₹1.28b more liquid assets than total liabilities.

This excess liquidity is a great indication that Ducon Infratechnolgies' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Ducon Infratechnolgies shareholders face the double whammy of a high net debt to EBITDA ratio (5.1), and fairly weak interest coverage, since EBIT is just 1.3 times the interest expense. This means we'd consider it to have a heavy debt load. Even more troubling is the fact that Ducon Infratechnolgies actually let its EBIT decrease by 4.0% over the last year. If that earnings trend continues the company will face an uphill battle to pay off its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ducon Infratechnolgies 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Ducon Infratechnolgies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Ducon Infratechnolgies's conversion of EBIT to free cash flow and interest cover definitely weigh on it, in our esteem. But its level of total liabilities tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that Ducon Infratechnolgies is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Ducon Infratechnolgies (of which 2 make us uncomfortable!) you should know about.

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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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.