Is HeidelbergCement India (NSE:HEIDELBERG) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies HeidelbergCement India Limited (NSE:HEIDELBERG) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HeidelbergCement India

What Is HeidelbergCement India's Net Debt?

The image below, which you can click on for greater detail, shows that HeidelbergCement India had debt of ₹2.80b at the end of March 2020, a reduction from ₹3.92b over a year. But on the other hand it also has ₹4.71b in cash, leading to a ₹1.91b net cash position.

How Strong Is HeidelbergCement India's Balance Sheet?

The latest balance sheet data shows that HeidelbergCement India had liabilities of ₹9.29b due within a year, and liabilities of ₹5.49b falling due after that. Offsetting this, it had ₹4.71b in cash and ₹927.6m in receivables that were due within 12 months. So its liabilities total ₹9.1b more than the combination of its cash and short-term receivables.

HeidelbergCement India has a market capitalization of ₹42.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, HeidelbergCement India boasts net cash, so it's fair to say it does not have a heavy debt load!

The bad news is that HeidelbergCement India saw its EBIT decline by 11% over the last year. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HeidelbergCement India 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. While HeidelbergCement India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HeidelbergCement India actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although HeidelbergCement India's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.91b. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in ₹4.2b. So we are not troubled with HeidelbergCement India's debt use. 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. Take risks, for example - HeidelbergCement India has 1 warning sign we think you should be aware of.

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.

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This article by Simply Wall St is general in nature. 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.
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