These 4 Measures Indicate That Darco Water Technologies (SGX:BLR) Is Using Debt Reasonably Well

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.' 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. We can see that Darco Water Technologies Limited (SGX:BLR) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Darco Water Technologies

What Is Darco Water Technologies's Debt?

As you can see below, Darco Water Technologies had S$3.63m of debt at December 2022, down from S$4.90m a year prior. However, its balance sheet shows it holds S$19.8m in cash, so it actually has S$16.2m net cash.

How Strong Is Darco Water Technologies' Balance Sheet?

According to the last reported balance sheet, Darco Water Technologies had liabilities of S$45.7m due within 12 months, and liabilities of S$4.31m due beyond 12 months. Offsetting this, it had S$19.8m in cash and S$44.9m in receivables that were due within 12 months. So it can boast S$14.7m more liquid assets than total liabilities.

This luscious liquidity implies that Darco Water Technologies' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Darco Water Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Darco Water Technologies improved its EBIT from a last year's loss to a positive S$57k. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Darco Water Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Darco Water Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Darco Water Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Darco Water Technologies has net cash of S$16.2m and plenty of liquid assets. So we don't have any problem with Darco Water Technologies's use of debt. 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. For example - Darco Water Technologies has 2 warning signs we think you should be aware of.

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.