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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, Dollar Industries Limited (NSE:DOLLAR) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Dollar Industries
How Much Debt Does Dollar Industries Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Dollar Industries had ₹2.23b of debt, an increase on ₹1.84b, over one year. However, it does have ₹221.6m in cash offsetting this, leading to net debt of about ₹2.01b.
How Strong Is Dollar Industries's Balance Sheet?
We can see from the most recent balance sheet that Dollar Industries had liabilities of ₹3.87b falling due within a year, and liabilities of ₹56.6m due beyond that. Offsetting this, it had ₹221.6m in cash and ₹3.48b in receivables that were due within 12 months. So it has liabilities totalling ₹222.8m more than its cash and near-term receivables, combined.
Since publicly traded Dollar Industries shares are worth a total of ₹10.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
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).