Does Action Construction Equipment (NSE:ACE) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Action Construction Equipment Limited (NSE:ACE) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 Action Construction Equipment

How Much Debt Does Action Construction Equipment Carry?

As you can see below, Action Construction Equipment had ₹597.8m of debt at September 2023, down from ₹1.10b a year prior. However, it does have ₹3.10b in cash offsetting this, leading to net cash of ₹2.50b.

A Look At Action Construction Equipment's Liabilities

We can see from the most recent balance sheet that Action Construction Equipment had liabilities of ₹8.10b falling due within a year, and liabilities of ₹161.7m due beyond that. On the other hand, it had cash of ₹3.10b and ₹1.74b worth of receivables due within a year. So it has liabilities totalling ₹3.42b more than its cash and near-term receivables, combined.

Of course, Action Construction Equipment has a market capitalization of ₹96.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Action Construction Equipment also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Action Construction Equipment grew its EBIT by 85% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Action Construction Equipment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Action Construction Equipment's liabilities, but we can be reassured by the fact it has has net cash of ₹2.50b. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think Action Construction Equipment's use of debt is risky. 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.

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.