Does Deccan Cements (NSE:DECCANCE) Have A Healthy Balance Sheet?

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. We can see that Deccan Cements Limited (NSE:DECCANCE) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Deccan Cements

How Much Debt Does Deccan Cements Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Deccan Cements had debt of ₹722.3m, up from ₹510.8m in one year. However, it does have ₹1.90b in cash offsetting this, leading to net cash of ₹1.18b.

A Look At Deccan Cements's Liabilities

According to the last reported balance sheet, Deccan Cements had liabilities of ₹1.68b due within 12 months, and liabilities of ₹1.17b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.90b as well as receivables valued at ₹551.4m due within 12 months. So it has liabilities totalling ₹392.1m more than its cash and near-term receivables, combined.

Since publicly traded Deccan Cements shares are worth a total of ₹5.03b, it seems unlikely that this level of liabilities would be a major 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, Deccan Cements also has more cash than debt, so we're pretty confident it can manage its debt safely.

Deccan Cements's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is Deccan Cements'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Deccan Cements 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. In the last three years, Deccan Cements's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Deccan Cements's liabilities, but we can be reassured by the fact it has has net cash of ₹1.18b. So we are not troubled with Deccan Cements's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Deccan Cements that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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