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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Blue Dart Express Limited (NSE:BLUEDART) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.
See our latest analysis for Blue Dart Express
What Is Blue Dart Express's Net Debt?
As you can see below, at the end of March 2019, Blue Dart Express had ₹5.72b of debt, up from ₹4.17b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹2.96b, its net debt is less, at about ₹2.76b.
How Healthy Is Blue Dart Express's Balance Sheet?
According to the last reported balance sheet, Blue Dart Express had liabilities of ₹7.87b due within 12 months, and liabilities of ₹4.47b due beyond 12 months. Offsetting these obligations, it had cash of ₹2.96b as well as receivables valued at ₹4.92b due within 12 months. So it has liabilities totalling ₹4.45b more than its cash and near-term receivables, combined.
Of course, Blue Dart Express has a market capitalization of ₹56.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.