We Think Kakatiya Cement Sugar and Industries (NSE:KAKATCEM) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kakatiya Cement Sugar and Industries Limited (NSE:KAKATCEM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kakatiya Cement Sugar and Industries

What Is Kakatiya Cement Sugar and Industries's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Kakatiya Cement Sugar and Industries had debt of ₹834.8m, up from ₹351.7m in one year. However, it does have ₹461.9m in cash offsetting this, leading to net debt of about ₹372.8m.

A Look At Kakatiya Cement Sugar and Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Kakatiya Cement Sugar and Industries had liabilities of ₹1.08b due within 12 months and liabilities of ₹82.5m due beyond that. Offsetting this, it had ₹461.9m in cash and ₹341.7m in receivables that were due within 12 months. So its liabilities total ₹357.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kakatiya Cement Sugar and Industries is worth ₹1.78b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kakatiya Cement Sugar and Industries'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.

Over 12 months, Kakatiya Cement Sugar and Industries reported revenue of ₹1.6b, which is a gain of 5.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Kakatiya Cement Sugar and Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹231m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹392m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Kakatiya Cement Sugar and Industries (2 are significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.