Is HeidelbergCement India (NSE:HEIDELBERG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, HeidelbergCement India Limited (NSE:HEIDELBERG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HeidelbergCement India

What Is HeidelbergCement India's Debt?

As you can see below, HeidelbergCement India had ₹2.82b of debt at September 2020, down from ₹4.08b a year prior. However, it does have ₹5.74b in cash offsetting this, leading to net cash of ₹2.91b.

How Strong Is HeidelbergCement India's Balance Sheet?

The latest balance sheet data shows that HeidelbergCement India had liabilities of ₹9.94b due within a year, and liabilities of ₹5.76b falling due after that. On the other hand, it had cash of ₹5.74b and ₹978.4m worth of receivables due within a year. So it has liabilities totalling ₹8.98b more than its cash and near-term receivables, combined.

Given HeidelbergCement India has a market capitalization of ₹51.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, HeidelbergCement India boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, HeidelbergCement India's EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is HeidelbergCement India'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.

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 recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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 100% of that EBIT to free cash flow, bringing in ₹4.3b. So we are not troubled with HeidelbergCement India's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with HeidelbergCement India , and understanding them should be part of your investment process.

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. 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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