Would Sagar Cements (NSE:SAGCEM) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Sagar Cements Limited (NSE:SAGCEM) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Sagar Cements

What Is Sagar Cements's Net Debt?

As you can see below, Sagar Cements had ₹14.9b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹1.63b in cash offsetting this, leading to net debt of about ₹13.2b.

How Healthy Is Sagar Cements' Balance Sheet?

We can see from the most recent balance sheet that Sagar Cements had liabilities of ₹11.0b falling due within a year, and liabilities of ₹12.3b due beyond that. Offsetting this, it had ₹1.63b in cash and ₹2.56b in receivables that were due within 12 months. So it has liabilities totalling ₹19.1b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹24.2b, so it does suggest shareholders should keep an eye on Sagar Cements' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sagar Cements's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sagar Cements made a loss at the EBIT level, and saw its revenue drop to ₹23b, which is a fall of 4.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Sagar Cements produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹558m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹1.3b. 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. We've identified 2 warning signs with Sagar Cements , and understanding them should be part of your investment process.

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.