David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Star Cement Limited (NSE:STARCEMENT) uses debt in its business. But does this debt worry shareholders?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
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What is Star Cement’s debt?
As you can see below, at the end of March 2022, Star Cement had a debt of ₹156.5 million, up from ₹147.6 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds ₹5.47 billion in cash, so he actually has ₹5.31 billion in net cash.
How strong is Star Cement’s balance sheet?
The latest balance sheet data shows that Star Cement had liabilities of ₹4.03 billion due within a year, and liabilities of ₹1.74 billion falling due thereafter. On the other hand, it had a cash position of ₹5.47 billion and ₹2.99 billion in receivables due within a year. So he actually has ₹2.69 billion After liquid assets than total liabilities.
This surplus suggests that Star Cement has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that Star Cement has more cash than debt is arguably a good indication that it can safely manage its debt.
In contrast, Star Cement has seen its EBIT fall by 5.6% over the last twelve months. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Star Cement can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. Star Cement may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. . to manage debt. Over the past three years, Star Cement has generated free cash flow of a very strong 85% of EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
While it is always a good idea to investigate a company’s debt, in this case Star Cement has ₹5.31 billion in net cash and a decent balance sheet. And it impressed us with free cash flow of ₹2.2 billion, or 85% of its EBIT. We therefore do not believe that Star Cement’s use of debt is risky. We’d be very happy to see if Star Cement insiders took action. If you do too, click this link now to take a (free) look at our list of reported insider trades.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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