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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that DQ Entertainment (International) Limited (NSE:DQE) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for DQ Entertainment (International)
How Much Debt Does DQ Entertainment (International) Carry?
The image below, which you can click on for greater detail, shows that DQ Entertainment (International) had debt of ₹4.60b at the end of March 2019, a reduction from ₹6.13b over a year. And it doesn't have much cash, so its net debt is about the same.
How Healthy Is DQ Entertainment (International)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that DQ Entertainment (International) had liabilities of ₹2.90b due within 12 months and liabilities of ₹3.82b due beyond that. Offsetting these obligations, it had cash of ₹38.9m as well as receivables valued at ₹198.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹6.48b.
The deficiency here weighs heavily on the ₹226.7m 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'd watch its balance sheet closely, without a doubt At the end of the day, DQ Entertainment (International) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DQ Entertainment (International) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.