We Think Gujarat Sidhee Cement (NSE:GSCLCEMENT) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Gujarat Sidhee Cement Limited (NSE:GSCLCEMENT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gujarat Sidhee Cement

What Is Gujarat Sidhee Cement's Debt?

As you can see below, Gujarat Sidhee Cement had ₹357.2m of debt at March 2020, down from ₹543.0m a year prior. But on the other hand it also has ₹556.9m in cash, leading to a ₹199.7m net cash position.

A Look At Gujarat Sidhee Cement's Liabilities

We can see from the most recent balance sheet that Gujarat Sidhee Cement had liabilities of ₹1.61b falling due within a year, and liabilities of ₹801.9m due beyond that. Offsetting these obligations, it had cash of ₹556.9m as well as receivables valued at ₹234.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.6b.

This is a mountain of leverage relative to its market capitalization of ₹2.65b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Gujarat Sidhee Cement boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Gujarat Sidhee Cement turned things around in the last 12 months, delivering and EBIT of ₹741m. 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 Gujarat Sidhee Cement 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Gujarat Sidhee Cement may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent year, Gujarat Sidhee Cement recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Gujarat Sidhee Cement's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹199.7m. So we are not troubled with Gujarat Sidhee Cement's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Gujarat Sidhee Cement that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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