These 4 Measures Indicate That Star Cement (NSE:STARCEMENT) Is Using Debt Safely

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. We can see that Star Cement Limited (NSE:STARCEMENT) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Star Cement

What Is Star Cement's Debt?

As you can see below, at the end of March 2022, Star Cement had ₹156.5m of debt, up from ₹147.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹5.47b in cash, so it actually has ₹5.31b net cash.

How Strong Is Star Cement's Balance Sheet?

The latest balance sheet data shows that Star Cement had liabilities of ₹4.03b due within a year, and liabilities of ₹1.74b falling due after that. On the other hand, it had cash of ₹5.47b and ₹2.99b worth of receivables due within a year. So it actually has ₹2.69b more liquid assets than total liabilities.

This surplus suggests that Star Cement has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Star Cement has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Star Cement saw its EBIT drop by 5.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Star 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Star 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, Star Cement generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Star Cement has ₹5.31b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.2b, being 85% of its EBIT. So we don't think Star Cement's use of debt is risky. We'd be very excited to see if Star Cement insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.