Is Kakatiya Cement Sugar and Industries (NSE: KAKATCEM) Using Too Much Debt?
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Kakatiya Cement Sugar and Industries Limited (NSE: KAKATCEM) uses debt in its activity. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Kakatiya Cement Sugar and Industries
What is the net debt of Kakatiya Cement Sugar and Industries?
As you can see below, Kakatiya Cement Sugar and Industries had a debt of 128.1 million yen in September 2021, up from 289.2 million yen the previous year. However, it has 1.02 billion yen in cash to compensate for this, which leads to a net cash position of 892.8 million yen.
How strong is Kakatiya Cement Sugar and Industries’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Kakatiya Cement Sugar and Industries had liabilities of 576.6 million yen owed within 12 months and liabilities of 100.5 million yen beyond. In compensation for these obligations, it had cash of 1.02 million as well as receivables valued at 203.2 million at 12 months. He can therefore boast of having â¬ 547.0 million in liquid assets more than total Liabilities.
It is good to see that Kakatiya Cement Sugar and Industries has a lot of liquidity on its balance sheet, which suggests careful management of liabilities. Because he has a lot of assets, he is unlikely to have any problems with his lenders. Put simply, the fact that Kakatiya Cement Sugar and Industries has more cash than debt is arguably a good indication that it can safely manage its debt.
Even more impressively, Kakatiya Cement Sugar and Industries increased its EBIT by 547% year over year. This boost will make it even easier to pay down debt in the future. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since Kakatiya Cement Sugar and Industries will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Kakatiya Cement Sugar and Industries may have net cash on the balance sheet, but it is always interesting to examine the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need for, and its ability to manage debt. Fortunately for all shareholders, Kakatiya Cement Sugar and Industries has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
While we sympathize with investors who find debts to be of concern, you should keep in mind that Kakatiya Cement Sugar and Industries has a net cash position of 892.8 million yen, as well as more liquid assets. that of liabilities. The icing on the cake is that he converted 312% of that EBIT into free cash flow, bringing in 70 million euros. In the end, we do not find the debt levels of Kakatiya Cement Sugar and Industries worrying at all. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, Kakatiya Cement Sugar and Industries has 2 warning signs (and 1 that can’t be ignored) we think you should be aware of.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit 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 using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.