Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a 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 Dredging Corporation of India Limited (NSE: DREDGECORP) uses debt in its business. But the more important question is: what risk does this debt create?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Dredging Corporation of India
What is the debt of Dredging Corporation of India?
As you can see below, Dredging Corporation of India had a debt of ₹4.07 billion in September 2021, up from ₹5.82 billion in the previous year. However, since he has a cash reserve of ₹441.5 million, his net debt is lower at around ₹3.63 billion.
A look at the liabilities of Dredging Corporation of India
We can see from the most recent balance sheet that Dredging Corporation of India had liabilities of ₹5.35 billion due within a year, and liabilities of ₹2.56 billion due beyond. In return, he had ₹441.5 million in cash and ₹1.97 billion in receivables due within 12 months. It therefore has liabilities totaling ₹5.51 billion more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Dredging Corporation of India has a market capitalization of ₹10.8 billion, and so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Dredging Corporation of India will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Last year, Dredging Corporation of India was not profitable at EBIT level but managed to increase its revenue by 2.5% to ₹7.4 billion. This growth rate is a little slow for our liking, but it takes all types to make a world.
It is important to note that Dredging Corporation of India recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, it lost a very considerable ₹1.5 billion in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. For example, we would not like to see a repeat of last year’s ₹1.6 billion loss. We therefore believe that this title is quite risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 1 warning sign for Dredging Corporation of India you should be aware.
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.
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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.