Here's Why HeidelbergCement India (NSE:HEIDELBERG) Can Manage Its Debt Responsibly

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.' 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. We can see that HeidelbergCement India Limited (NSE:HEIDELBERG) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HeidelbergCement India

How Much Debt Does HeidelbergCement India Carry?

You can click the graphic below for the historical numbers, but it shows that HeidelbergCement India had ₹2.82b of debt in September 2020, down from ₹3.98b, one year before. But it also has ₹5.74b in cash to offset that, meaning it has ₹2.91b net cash.

How Strong Is HeidelbergCement India's Balance Sheet?

According to the last reported balance sheet, HeidelbergCement India had liabilities of ₹9.94b due within 12 months, and liabilities of ₹5.76b due beyond 12 months. On the other hand, it had cash of ₹5.74b and ₹978.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.98b.

Since publicly traded HeidelbergCement India shares are worth a total of ₹47.2b, 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, HeidelbergCement India also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, HeidelbergCement India's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is HeidelbergCement India'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HeidelbergCement India 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, HeidelbergCement India actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although HeidelbergCement India's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹2.91b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in ₹4.3b. So we don't have any problem with HeidelbergCement India's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for HeidelbergCement India 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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