Is Ducon Infratechnologies (NSE:DUCON) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ducon Infratechnologies Limited (NSE:DUCON) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ducon Infratechnologies

What Is Ducon Infratechnologies's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Ducon Infratechnologies had debt of ₹949.1m, up from ₹824.5m in one year. However, it also had ₹103.4m in cash, and so its net debt is ₹845.7m.

How Strong Is Ducon Infratechnologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ducon Infratechnologies had liabilities of ₹1.37b due within 12 months and liabilities of ₹165.6m due beyond that. Offsetting this, it had ₹103.4m in cash and ₹2.42b in receivables that were due within 12 months. So it can boast ₹984.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Ducon Infratechnologies' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 1.5 times and a disturbingly high net debt to EBITDA ratio of 5.2 hit our confidence in Ducon Infratechnologies like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Even more troubling is the fact that Ducon Infratechnologies actually let its EBIT decrease by 2.7% over the last year. If that earnings trend continues the company will face an uphill battle to pay off its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ducon Infratechnologies'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Ducon Infratechnologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Both Ducon Infratechnologies's conversion of EBIT to free cash flow and its interest cover were discouraging. But on the brighter side of life, its level of total liabilities leaves us feeling more frolicsome. Looking at all the angles mentioned above, it does seem to us that Ducon Infratechnologies 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. 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. To that end, you should learn about the 2 warning signs we've spotted with Ducon Infratechnologies (including 1 which doesn't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.