Would Kakatiya Cement Sugar and Industries (NSE:KAKATCEM) Be Better Off With Less Debt?

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. We note that Kakatiya Cement Sugar and Industries Limited (NSE:KAKATCEM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kakatiya Cement Sugar and Industries

What Is Kakatiya Cement Sugar and Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Kakatiya Cement Sugar and Industries had ₹756.3m of debt, an increase on ₹434.3m, over one year. On the flip side, it has ₹476.1m in cash leading to net debt of about ₹280.1m.

How Strong Is Kakatiya Cement Sugar and Industries' Balance Sheet?

We can see from the most recent balance sheet that Kakatiya Cement Sugar and Industries had liabilities of ₹936.3m falling due within a year, and liabilities of ₹81.8m due beyond that. On the other hand, it had cash of ₹476.1m and ₹307.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹234.9m.

Given Kakatiya Cement Sugar and Industries has a market capitalization of ₹1.90b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kakatiya Cement Sugar and Industries will need earnings to service that debt. 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 10%, 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

Over the last twelve months Kakatiya Cement Sugar and Industries produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹29m. 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. However, it doesn't help that it burned through ₹233m of cash over the last year. 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. Be aware that Kakatiya Cement Sugar and Industries is showing 4 warning signs in our investment analysis , and 1 of those is significant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.