DCM Nouvelle (NSE:DCMNVL) takes some risk with its use of debt

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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that DCM New Limited (NSE: DCMNVL) uses debt in its business. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt 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. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for DCM Nouvelle

What is DCM Nouvelle’s net debt?

As you can see below, at the end of September 2022, DCM Nouvelle had a debt of ₹721.1 million, up from ₹677.1 million a year ago. Click on the image for more details. However, he has ₹354.7 million in cash to offset this, resulting in a net debt of around ₹366.4 million.

A look at the liabilities of DCM Nouvelle

According to the latest published balance sheet, DCM Nouvelle had liabilities of ₹694.6 million due within 12 months and liabilities of ₹472.5 million due beyond 12 months. As compensation for these obligations, it had cash of ₹354.7 million as well as receivables valued at ₹380.7 million due within 12 months. Thus, its liabilities total ₹431.7 million more than the combination of its cash and short-term receivables.

Given that publicly traded DCM Nouvelle shares are worth a total of ₹2.86 billion, it seems unlikely that this level of liabilities will pose a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

DCM Nouvelle has a low net debt to EBITDA ratio of just 0.38. And its EBIT covers its interest charges 50.4 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Fortunately, DCM Nouvelle’s workload is not too heavy, as its EBIT fell by 39% over last year. When it comes to paying off debt, lower income is no more helpful than sugary sodas for your health. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since DCM Nouvelle will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, DCM Nouvelle has achieved a free cash flow of 14% of its EBIT, which is really quite low. This low level of cash conversion compromises its ability to manage and repay its debt.

Our point of view

We are apprehensive about DCM Nouvelle’s difficult EBIT growth rate, but we also have some positives to focus on. For example, its interest coverage and its net debt to EBITDA give us some confidence in its ability to manage its debt. From all the angles mentioned above, it seems to us that DCM Nouvelle is a somewhat risky investment due to its indebtedness. Not all risk is bad, as it can increase stock price returns if it pays off, but this leverage risk is worth keeping in mind. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for DCM New you should know.

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.