DCM Shriram (NSE:DCMSHRIRAM) Seems To Use Debt Quite Sensibly

Simply Wall St · 03/14 00:16

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, DCM Shriram Limited (NSE:DCMSHRIRAM) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for DCM Shriram

What Is DCM Shriram's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 DCM Shriram had ₹22.0b of debt, an increase on ₹15.4b, over one year. However, it also had ₹17.6b in cash, and so its net debt is ₹4.47b.

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NSEI:DCMSHRIRAM Debt to Equity History March 14th 2025

A Look At DCM Shriram's Liabilities

We can see from the most recent balance sheet that DCM Shriram had liabilities of ₹31.0b falling due within a year, and liabilities of ₹23.6b due beyond that. Offsetting these obligations, it had cash of ₹17.6b as well as receivables valued at ₹7.25b due within 12 months. So it has liabilities totalling ₹29.8b more than its cash and near-term receivables, combined.

Of course, DCM Shriram has a market capitalization of ₹153.9b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt sitting at just 0.40 times EBITDA, DCM Shriram is arguably pretty conservatively geared. And it boasts interest cover of 8.7 times, which is more than adequate. Fortunately, DCM Shriram grew its EBIT by 4.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is DCM Shriram's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, DCM Shriram burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen DCM Shriram is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to handle its debt, based on its EBITDA, is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about DCM Shriram's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with DCM Shriram (including 1 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.