These 4 Measures Indicate That Deccan Cements (NSE:DECCANCE) Is Using Debt Extensively

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 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 note that Deccan Cements Limited (NSE:DECCANCE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Deccan Cements

How Much Debt Does Deccan Cements Carry?

As you can see below, at the end of March 2022, Deccan Cements had ₹1.66b of debt, up from ₹849.6m a year ago. Click the image for more detail. However, it does have ₹2.98b in cash offsetting this, leading to net cash of ₹1.31b.

A Look At Deccan Cements' Liabilities

Zooming in on the latest balance sheet data, we can see that Deccan Cements had liabilities of ₹2.36b due within 12 months and liabilities of ₹1.04b due beyond that. Offsetting this, it had ₹2.98b in cash and ₹257.5m in receivables that were due within 12 months. So its liabilities total ₹160.1m more than the combination of its cash and short-term receivables.

Of course, Deccan Cements has a market capitalization of ₹7.17b, so these liabilities are probably manageable. 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.

In fact Deccan Cements's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. 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 Deccan 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. 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. Over the last three years, Deccan Cements reported free cash flow worth 9.9% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Deccan Cements has ₹1.31b in net cash. So although we see some areas for improvement, we're not too worried about Deccan Cements's balance sheet. 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 example - Deccan Cements has 3 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.