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, D. P. Abhushan Limited (NSE:DPABHUSHAN) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for D. P. Abhushan

What Is D. P. Abhushan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that D. P. Abhushan had ₹971.2m of debt in March 2019, down from ₹1.25b, one year before. However, because it has a cash reserve of ₹72.3m, its net debt is less, at about ₹898.9m.

How Strong Is D. P. Abhushan's Balance Sheet?

According to the last reported balance sheet, D. P. Abhushan had liabilities of ₹1.29b due within 12 months, and liabilities of ₹486.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹72.3m as well as receivables valued at ₹29.6m due within 12 months. So its liabilities total ₹1.67b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹890.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, D. P. Abhushan would likely require a major re-capitalisation if it had to pay its creditors today.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

D. P. Abhushan has a debt to EBITDA ratio of 3.3 and its EBIT covered its interest expense 2.7 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. However, one redeeming factor is that D. P. Abhushan grew its EBIT at 15% over the last 12 months, boosting its ability to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is D. P. Abhushan'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.