Does Shyam Metalics and Energy (NSE:SHYAMMETL) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shyam Metalics and Energy Limited (NSE:SHYAMMETL) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Shyam Metalics and Energy

What Is Shyam Metalics and Energy's Debt?

The image below, which you can click on for greater detail, shows that Shyam Metalics and Energy had debt of ₹10.8b at the end of September 2024, a reduction from ₹19.8b over a year. But it also has ₹12.3b in cash to offset that, meaning it has ₹1.54b net cash.

A Look At Shyam Metalics and Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Shyam Metalics and Energy had liabilities of ₹46.4b due within 12 months and liabilities of ₹4.30b due beyond that. Offsetting this, it had ₹12.3b in cash and ₹7.27b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹31.2b.

Given Shyam Metalics and Energy has a market capitalization of ₹199.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Shyam Metalics and Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shyam Metalics and Energy has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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 Shyam Metalics and Energy'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shyam Metalics and Energy 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, Shyam Metalics and Energy actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Shyam Metalics and Energy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.54b. And it impressed us with its EBIT growth of 40% over the last year. So we don't have any problem with Shyam Metalics and Energy's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shyam Metalics and Energy has 1 warning sign we think you should be aware of.

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.