Is Ambuja Cements (NSE:AMBUJACEM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Ambuja Cements Limited (NSE:AMBUJACEM) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Ambuja Cements

What Is Ambuja Cements's Net Debt?

As you can see below, at the end of March 2023, Ambuja Cements had ₹5.23b of debt, up from ₹487.1m a year ago. Click the image for more detail. But it also has ₹97.5b in cash to offset that, meaning it has ₹92.3b net cash.

How Healthy Is Ambuja Cements' Balance Sheet?

The latest balance sheet data shows that Ambuja Cements had liabilities of ₹115.1b due within a year, and liabilities of ₹14.5b falling due after that. Offsetting this, it had ₹97.5b in cash and ₹18.3b in receivables that were due within 12 months. So it has liabilities totalling ₹13.9b more than its cash and near-term receivables, combined.

This state of affairs indicates that Ambuja Cements' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹845.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ambuja Cements boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Ambuja Cements if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ambuja Cements's ability to maintain a healthy balance sheet going forward. 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. Ambuja Cements 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. In the last three years, Ambuja Cements created free cash flow amounting to 4.9% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Ambuja Cements's liabilities, but we can be reassured by the fact it has has net cash of ₹92.3b. So we are not troubled with Ambuja Cements's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Ambuja Cements that you should be aware of.

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.