These 4 Measures Indicate That Cementir Holding (BIT:CEM) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Cementir Holding N.V. (BIT:CEM) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Cementir Holding

What Is Cementir Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Cementir Holding had debt of €210.7m at the end of June 2023, a reduction from €237.6m over a year. However, it does have €245.5m in cash offsetting this, leading to net cash of €34.9m.

A Look At Cementir Holding's Liabilities

The latest balance sheet data shows that Cementir Holding had liabilities of €500.3m due within a year, and liabilities of €409.3m falling due after that. Offsetting these obligations, it had cash of €245.5m as well as receivables valued at €303.9m due within 12 months. So it has liabilities totalling €360.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cementir Holding has a market capitalization of €1.40b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Cementir Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Cementir Holding has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cementir Holding can strengthen its balance sheet over time. 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. Cementir Holding 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, Cementir Holding produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Cementir Holding does have more liabilities than liquid assets, it also has net cash of €34.9m. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think Cementir Holding's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Cementir Holding you should be aware of.

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.