Does Shree Cement (NSE:SHREECEM) Have A Healthy Balance Sheet?

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. Importantly, Shree Cement Limited (NSE:SHREECEM) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 Shree Cement

What Is Shree Cement's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shree Cement had ₹18.2b of debt in September 2023, down from ₹27.8b, one year before. However, its balance sheet shows it holds ₹52.9b in cash, so it actually has ₹34.7b net cash.

How Strong Is Shree Cement's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shree Cement had liabilities of ₹59.2b due within 12 months and liabilities of ₹12.6b due beyond that. On the other hand, it had cash of ₹52.9b and ₹16.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.56b.

This state of affairs indicates that Shree Cement's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹1.01t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shree Cement boasts net cash, so it's fair to say it does not have a heavy debt load!

Shree Cement's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 Shree Cement can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shree Cement may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Shree Cement's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shree Cement has ₹34.7b in net cash. So we are not troubled with Shree Cement's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shree Cement .

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. 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.