Here’s why Delta (NSE: DELTACORP) can manage its debt responsibly
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will 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. Like many other companies Delta Corp Limited (NSE: DELTACORP) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debts and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. 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.
See our latest analysis for Delta
What is Delta’s debt?
The graph below, which you can click on for more details, shows that Delta had ₹317.4 million in debt as of September 2021; about the same as the previous year. But he also has ₹5.38 billion in cash to offset this, meaning he has a net cash of ₹5.06 billion.
How healthy is Delta’s balance sheet?
The latest balance sheet data shows that Delta had liabilities of ₹1.82 billion due within a year, and liabilities of ₹466.1 million falling due thereafter. On the other hand, it had a cash position of ₹5.38 billion and ₹141.0 million in receivables due within a year. He can therefore boast of having $3.23 billion more in liquid assets than total Passives.
This short-term liquidity is a sign that Delta could probably repay its debt easily, as its balance sheet is far from stretched. In short, Delta has clean cash, so it’s fair to say that it doesn’t have a lot of debt!
Although Delta posted a loss in EBIT last year, it was also good to see that it generated £919 million of EBIT in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Delta’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Delta has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) this cash balance. . In the most recent year, Delta recorded free cash flow of 64% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
While it’s always a good idea to investigate a company’s debt, in this case Delta has ₹5.06 billion in net cash and a decent balance sheet. We therefore do not believe that Delta’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Delta has 3 warning signs (and 1 which is potentially serious) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% free, at present.
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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.