We Think Shree Cement (NSE:SHREECEM) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Shree Cement Limited (NSE:SHREECEM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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 at September 2021 Shree Cement had debt of ₹21.4b, up from ₹18.7b in one year. However, its balance sheet shows it holds ₹36.5b in cash, so it actually has ₹15.0b net cash.

How Healthy 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. On the other hand, it had cash of ₹36.5b and ₹8.31b worth of receivables due within a year. 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 while it's hard to imagine that the ₹865.3b company is struggling for cash, we still think it's worth monitoring its 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!

And we also note warmly that Shree Cement grew its EBIT by 14% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shree Cement has ₹15.0b in net cash. And it impressed us with free cash flow of ₹16b, being 92% of its EBIT. So is Shree Cement's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shree Cement that you should be aware of before investing here.

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.