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.' 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. Importantly, Digicontent Limited (NSE:DGCONTENT) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Digicontent
How Much Debt Does Digicontent Carry?
The chart below, which you can click on for greater detail, shows that Digicontent had ₹800.0m in debt in March 2019; about the same as the year before. On the flip side, it has ₹121.9m in cash leading to net debt of about ₹678.1m.
How Strong Is Digicontent's Balance Sheet?
The latest balance sheet data shows that Digicontent had liabilities of ₹474.0m due within a year, and liabilities of ₹901.0m falling due after that. Offsetting this, it had ₹121.9m in cash and ₹663.3m in receivables that were due within 12 months. So its liabilities total ₹589.8m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹372.4m 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. At the end of the day, Digicontent would probably need a major re-capitalization if its creditors were to demand repayment.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).