These 4 Measures Indicate That Ambuja Cements (NSE:AMBUJACEM) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Ambuja Cements Limited (NSE:AMBUJACEM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ambuja Cements

How Much Debt Does Ambuja Cements Carry?

You can click the graphic below for the historical numbers, but it shows that Ambuja Cements had ₹405.2m of debt in September 2024, down from ₹441.8m, one year before. However, it does have ₹88.0b in cash offsetting this, leading to net cash of ₹87.6b.

A Look At Ambuja Cements' Liabilities

According to the last reported balance sheet, Ambuja Cements had liabilities of ₹133.1b due within 12 months, and liabilities of ₹33.5b due beyond 12 months. Offsetting these obligations, it had cash of ₹88.0b as well as receivables valued at ₹19.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹59.6b.

Given Ambuja Cements has a humongous market capitalization of ₹1.41t, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Ambuja Cements also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Ambuja Cements has increased its EBIT by 4.6% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ambuja Cements 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. 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. During the last three years, Ambuja Cements burned a lot of cash. 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

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 ₹87.6b. And it also grew its EBIT by 4.6% over the last year. So we don't have any problem with Ambuja Cements's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ambuja Cements is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.