Does Barak Valley Cements (NSE:BVCL) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Barak Valley Cements Limited (NSE:BVCL) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Barak Valley Cements

What Is Barak Valley Cements's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Barak Valley Cements had ₹975.5m of debt, an increase on ₹901.4m, over one year. However, it does have ₹21.0m in cash offsetting this, leading to net debt of about ₹954.5m.

How Strong Is Barak Valley Cements's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Barak Valley Cements had liabilities of ₹960.1m due within 12 months and liabilities of ₹717.6m due beyond that. Offsetting these obligations, it had cash of ₹21.0m as well as receivables valued at ₹143.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.51b.

The deficiency here weighs heavily on the ₹381.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Barak Valley Cements would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.92 times and a disturbingly high net debt to EBITDA ratio of 6.2 hit our confidence in Barak Valley Cements like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. The good news is that Barak Valley Cements improved its EBIT by 5.8% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. There's no doubt that we learn most about debt from the balance sheet. But it is Barak Valley Cements's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Barak Valley Cements recorded free cash flow worth 57% 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.

Our View

To be frank both Barak Valley Cements's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. We're quite clear that we consider Barak Valley Cements to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Barak Valley Cements (of which 2 make us uncomfortable!) you should know about.

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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