Debock Industries (NSE:DIL) seems to be using debt quite wisely

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Debock Industries Limited (NSE:DIL) uses debt in its business. But does this debt worry shareholders?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Debock Industries

How much debt does Debock Industries have?

As you can see below, Debock Industries had a debt of ₹146.2 million in March 2022, up from ₹212.4 million the previous year. However, he has ₹26.7 million in cash to offset this, resulting in a net debt of around ₹119.5 million.

NSEI:DIL Debt to Equity June 2, 2022

How strong is Debock Industries’ balance sheet?

We can see from the most recent balance sheet that Debock Industries had liabilities of ₹182.6m due within a year, and liabilities of ₹32.3m due beyond. As compensation for these obligations, it had cash of ₹26.7 million as well as receivables valued at ₹94.2 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹93.9 million.

Given that publicly traded Debock Industries shares are worth a total of ₹2.48 billion, it seems unlikely that this level of liabilities will pose a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Debock Industries has net debt of just 1.1x EBITDA, indicating that it is certainly not an imprudent borrower. And this view is supported by strong interest coverage, with EBIT amounting to 9.6 times interest expense over the past year. Even better, Debock Industries increased its EBIT by 168% last year, which is an impressive improvement. This boost will make paying off debt even easier in the future. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Debock Industries will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Debock Industries has burned through a lot of cash. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

Fortunately, Debock Industries’ impressive EBIT growth rate means it has the upper hand on its debt. But we have to admit that we see that converting it from EBIT to free cash flow has the opposite effect. Looking at all of the aforementioned factors together, it seems to us that Debock Industries can manage its debt quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth keeping an eye on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Debock Industries you should be aware, and 2 of them are a bit of a concern.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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