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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Anjani Portland Cement Limited (NSE:APCL) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Anjani Portland Cement
What Is Anjani Portland Cement's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Anjani Portland Cement had ₹4.36b of debt in March 2023, down from ₹4.97b, one year before. And it doesn't have much cash, so its net debt is about the same.
A Look At Anjani Portland Cement's Liabilities
According to the last reported balance sheet, Anjani Portland Cement had liabilities of ₹2.20b due within 12 months, and liabilities of ₹4.84b due beyond 12 months. On the other hand, it had cash of ₹10.9m and ₹442.9m worth of receivables due within a year. So it has liabilities totalling ₹6.59b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of ₹4.77b, we think shareholders really should watch Anjani Portland Cement's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Anjani Portland Cement's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Anjani Portland Cement made a loss at the EBIT level, and saw its revenue drop to ₹6.6b, which is a fall of 17%. That's not what we would hope to see.
Caveat Emptor
Not only did Anjani Portland Cement's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹297m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₹581m. In the meantime, we consider the stock to be risky. 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. For example Anjani Portland Cement has 5 warning signs (and 2 which can't be ignored) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
About NSEI:APCL
Low and slightly overvalued.
