Shree Cement (NSE:SHREECEM) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shree Cement Limited (NSE:SHREECEM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shree Cement

What Is Shree Cement's Debt?

The image below, which you can click on for greater detail, shows that Shree Cement had debt of ₹14.5b at the end of September 2024, a reduction from ₹18.2b over a year. However, it does have ₹57.0b in cash offsetting this, leading to net cash of ₹42.5b.

How Strong Is Shree Cement's Balance Sheet?

According to the last reported balance sheet, Shree Cement had liabilities of ₹58.8b due within 12 months, and liabilities of ₹10.6b due beyond 12 months. On the other hand, it had cash of ₹57.0b and ₹18.2b worth of receivables due within a year. So it can boast ₹5.73b more liquid assets than total liabilities.

Having regard to Shree Cement's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹935.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Shree Cement has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Shree Cement saw its EBIT drop by 7.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shree Cement has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Shree Cement actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shree Cement has ₹42.5b in net cash and a decent-looking balance sheet. 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. Be aware that Shree Cement is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.