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. We note that DFM Foods Limited (NSE:DFM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DFM Foods

What Is DFM Foods's Debt?

As you can see below, DFM Foods had ₹934.5m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. On the flip side, it has ₹901.3m in cash leading to net debt of about ₹33.2m.

A Look At DFM Foods's Liabilities

According to the last reported balance sheet, DFM Foods had liabilities of ₹714.4m due within 12 months, and liabilities of ₹1.10b due beyond 12 months. On the other hand, it had cash of ₹901.3m and ₹15.6m worth of receivables due within a year. So its liabilities total ₹902.4m more than the combination of its cash and short-term receivables.

Since publicly traded DFM Foods shares are worth a total of ₹13.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, DFM Foods has a very light debt load indeed.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.