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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. We note that DIC India Limited (NSE:DICIND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
See our latest analysis for DIC India
How Much Debt Does DIC India Carry?
The image below, which you can click on for greater detail, shows that at June 2019 DIC India had debt of ₹475.0m, up from ₹452.9m in one year. But it also has ₹727.2m in cash to offset that, meaning it has ₹252.1m net cash.
How Healthy Is DIC India's Balance Sheet?
According to the last reported balance sheet, DIC India had liabilities of ₹2.57b due within 12 months, and liabilities of ₹39.9m due beyond 12 months. On the other hand, it had cash of ₹727.2m and ₹2.16b worth of receivables due within a year. So it actually has ₹276.5m more liquid assets than total liabilities.
This surplus suggests that DIC India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that DIC India has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, DIC India turned things around in the last 12 months, delivering and EBIT of ₹66m. When analysing debt levels, the balance sheet is the obvious place to start. But it is DIC India'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.