Action Construction Equipment (NSE:ACE) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Action Construction Equipment Limited (NSE:ACE) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Action Construction Equipment Carry?

The image below, which you can click on for greater detail, shows that at September 2025 Action Construction Equipment had debt of ₹1.34b, up from ₹1.14b in one year. But on the other hand it also has ₹4.92b in cash, leading to a ₹3.58b net cash position.

How Strong Is Action Construction Equipment's Balance Sheet?

According to the last reported balance sheet, Action Construction Equipment had liabilities of ₹11.8b due within 12 months, and liabilities of ₹290.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹4.92b as well as receivables valued at ₹2.85b due within 12 months. So it has liabilities totalling ₹4.31b more than its cash and near-term receivables, combined.

Of course, Action Construction Equipment has a market capitalization of ₹121.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Action Construction Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Action Construction Equipment

Also good is that Action Construction Equipment grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Action Construction Equipment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Action Construction Equipment 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. Over the most recent three years, Action Construction Equipment recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Action Construction Equipment has ₹3.58b in net cash. And it impressed us with its EBIT growth of 18% over the last year. So is Action Construction Equipment's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Action Construction Equipment, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.