Is Lloyds Steels Industries (NSE:LSIL) A Risky Investment?

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.' 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. Importantly, Lloyds Steels Industries Limited (NSE:LSIL) does carry debt. But the real question is whether this debt is making the company risky.

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Lloyds Steels Industries

What Is Lloyds Steels Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Lloyds Steels Industries had ₹229.8m of debt, an increase on ₹48.1m, over one year. But it also has ₹245.9m in cash to offset that, meaning it has ₹16.2m net cash.

How Strong Is Lloyds Steels Industries' Balance Sheet?

The latest balance sheet data shows that Lloyds Steels Industries had liabilities of ₹320.9m due within a year, and liabilities of ₹267.9m falling due after that. On the other hand, it had cash of ₹245.9m and ₹445.0m worth of receivables due within a year. So it can boast ₹102.1m more liquid assets than total liabilities.

Having regard to Lloyds Steels Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹14.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Lloyds Steels Industries 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, Lloyds Steels Industries turned things around in the last 12 months, delivering and EBIT of ₹186m. 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 Lloyds Steels Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lloyds Steels Industries 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 year, Lloyds Steels Industries saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lloyds Steels Industries has net cash of ₹16.2m, as well as more liquid assets than liabilities. So we are not troubled with Lloyds Steels Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Lloyds Steels Industries you should know about.

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.