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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mishra Dhatu Nigam Limited (NSE:MIDHANI) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Mishra Dhatu Nigam
What Is Mishra Dhatu Nigam's Debt?
As you can see below, at the end of March 2019, Mishra Dhatu Nigam had ₹1.07b of debt, up from ₹928.5m a year ago. Click the image for more detail. However, it does have ₹2.08b in cash offsetting this, leading to net cash of ₹1.01b.
How Strong Is Mishra Dhatu Nigam's Balance Sheet?
We can see from the most recent balance sheet that Mishra Dhatu Nigam had liabilities of ₹5.34b falling due within a year, and liabilities of ₹4.56b due beyond that. On the other hand, it had cash of ₹2.08b and ₹4.42b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.40b.
Of course, Mishra Dhatu Nigam has a market capitalization of ₹21.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Mishra Dhatu Nigam also has more cash than debt, so we're pretty confident it can manage its debt safely.
While Mishra Dhatu Nigam doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mishra Dhatu Nigam will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.