These 4 Measures Indicate That Gujarat Sidhee Cement (NSE:GSCLCEMENT) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Gujarat Sidhee Cement Limited (NSE:GSCLCEMENT) makes use of 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gujarat Sidhee Cement

What Is Gujarat Sidhee Cement's Net Debt?

As you can see below, Gujarat Sidhee Cement had ₹298.3m of debt at March 2021, down from ₹446.1m a year prior. But on the other hand it also has ₹862.1m in cash, leading to a ₹563.8m net cash position.

How Strong Is Gujarat Sidhee Cement's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gujarat Sidhee Cement had liabilities of ₹1.56b due within 12 months and liabilities of ₹793.5m due beyond that. Offsetting these obligations, it had cash of ₹862.1m as well as receivables valued at ₹200.1m due within 12 months. So it has liabilities totalling ₹1.29b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Gujarat Sidhee Cement has a market capitalization of ₹5.33b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Gujarat Sidhee Cement boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Gujarat Sidhee Cement's load is not too heavy, because its EBIT was down 35% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gujarat Sidhee Cement will need earnings to service that debt. 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 Gujarat Sidhee Cement 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 most recent two years, Gujarat Sidhee Cement 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.

Summing up

While Gujarat Sidhee Cement does have more liabilities than liquid assets, it also has net cash of ₹563.8m. So we don't have any problem with Gujarat Sidhee Cement's use of debt. 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. We've identified 3 warning signs with Gujarat Sidhee Cement , and understanding them should be part of your investment process.

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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