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. 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, Dhanuka Agritech Limited (NSE:DHANUKA) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dhanuka Agritech

What Is Dhanuka Agritech's Net Debt?

As you can see below, at the end of March 2019, Dhanuka Agritech had ₹222.1m of debt, up from ₹47.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹309.7m in cash, so it actually has ₹87.6m net cash.

How Strong Is Dhanuka Agritech's Balance Sheet?

According to the last reported balance sheet, Dhanuka Agritech had liabilities of ₹1.63b due within 12 months, and liabilities of ₹299.4m due beyond 12 months. On the other hand, it had cash of ₹309.7m and ₹3.25b worth of receivables due within a year. So it actually has ₹1.63b more liquid assets than total liabilities.

This short term liquidity is a sign that Dhanuka Agritech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Dhanuka Agritech boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Dhanuka Agritech saw its EBIT drop by 3.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dhanuka Agritech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Dhanuka Agritech has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Dhanuka Agritech's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Dhanuka Agritech has net cash of ₹87.6m, as well as more liquid assets than liabilities. So we don't have any problem with Dhanuka Agritech's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Dhanuka Agritech insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.