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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Delta Magnets Limited (NSE:DELTAMAGNT) does carry debt. But the real question is whether this debt is making the company risky.
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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 Delta Magnets
How Much Debt Does Delta Magnets Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Delta Magnets had ₹541.7m of debt, an increase on ₹446.2m, over one year. However, because it has a cash reserve of ₹37.8m, its net debt is less, at about ₹503.9m.
How Healthy Is Delta Magnets's Balance Sheet?
According to the last reported balance sheet, Delta Magnets had liabilities of ₹627.9m due within 12 months, and liabilities of ₹163.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹37.8m as well as receivables valued at ₹226.5m due within 12 months. So it has liabilities totalling ₹526.9m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹289.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Delta Magnets would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Delta Magnets 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.