Is Shree Cement (NSE:SHREECEM) A Risky Investment?

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, Shree Cement Limited (NSE:SHREECEM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shree Cement

How Much Debt Does Shree Cement Carry?

As you can see below, at the end of September 2021, Shree Cement had ₹20.4b of debt, up from ₹18.7b a year ago. Click the image for more detail. But on the other hand it also has ₹36.5b in cash, leading to a ₹16.1b net cash position.

How Strong Is Shree Cement's Balance Sheet?

According to the last reported balance sheet, Shree Cement had liabilities of ₹36.5b due within 12 months, and liabilities of ₹21.6b due beyond 12 months. Offsetting this, it had ₹36.5b in cash and ₹8.31b in receivables that were due within 12 months. So it has liabilities totalling ₹13.3b more than its cash and near-term receivables, combined.

Having regard to Shree Cement's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹970.5b 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!

On top of that, Shree Cement grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shree Cement's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, Shree Cement generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Shree Cement's liabilities, but we can be reassured by the fact it has has net cash of ₹16.1b. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in ₹16b. So is Shree Cement's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shree Cement, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.

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