Here's Why India Cements (NSE:INDIACEM) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 The India Cements Limited (NSE:INDIACEM) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for India Cements

What Is India Cements's Debt?

The image below, which you can click on for greater detail, shows that India Cements had debt of ₹21.3b at the end of September 2024, a reduction from ₹28.3b over a year. However, it also had ₹748.9m in cash, and so its net debt is ₹20.6b.

How Healthy Is India Cements' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that India Cements had liabilities of ₹23.0b due within 12 months and liabilities of ₹20.8b due beyond that. On the other hand, it had cash of ₹748.9m and ₹12.2b worth of receivables due within a year. So its liabilities total ₹30.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since India Cements has a market capitalization of ₹107.1b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if India Cements can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year India Cements had a loss before interest and tax, and actually shrunk its revenue by 18%, to ₹45b. We would much prefer see growth.

Caveat Emptor

While India Cements's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹3.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹2.0b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 - India Cements has 1 warning sign we think you should be aware of.

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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