Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Destiny Logistics & Infra Limited (NSE:DESTINY) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Destiny Logistics & Infra

What Is Destiny Logistics & Infra’s Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Destiny Logistics & Infra had debt of ₹132.7m, up from ₹18.2m in one year. However, it does have ₹6.20m in cash offsetting this, leading to net debt of about ₹126.5m.

How Healthy Is Destiny Logistics & Infra’s Balance Sheet?

We can see from the most recent balance sheet that Destiny Logistics & Infra had liabilities of ₹253.7m falling due within a year, and liabilities of ₹2.83m due beyond that. On the other hand, it had cash of ₹6.20m and ₹346.1m worth of receivables due within a year. So it can boast ₹95.7m more liquid assets than total liabilities.

This surplus suggests that Destiny Logistics & Infra is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Destiny Logistics & Infra has a debt to EBITDA ratio of 3.2 and its EBIT covered its interest expense 4.1 times. Taken together this implies that, while we wouldn’t want to see debt levels rise, we think it can handle its current leverage. On a slightly more positive note, Destiny Logistics & Infra grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since Destiny Logistics & Infra will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Destiny Logistics & Infra 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 Destiny Logistics & Infra 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 to grow its EBIT is pretty flash. Looking at all this data makes us feel a little cautious about Destiny Logistics & Infra’s debt levels. While we appreciate debt can enhance returns on equity, we’d suggest that shareholders keep close watch on its debt levels, lest they increase. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 5 warning signs for Destiny Logistics & Infra (4 are concerning) you should be aware of.

If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com