David Iben once stated that volatility is not a risk to be concerned about, but rather the permanent loss of capital. This statement is particularly relevant when considering a company’s balance sheet and debt levels. Shree Cement Limited, listed on the NSE under the ticker SHREECEM, is no exception to this rule. The company, like many others, utilizes debt in its operations. However, the question remains whether this debt poses a concern for shareholders.
Generally, debt becomes a problem when a company is unable to pay it off, either by raising capital or using its own cash flow. This can lead to lenders forcing the company to raise capital at a distressed price, resulting in the permanent dilution of shareholders. Nevertheless, most companies manage their debt reasonably well, and it is not uncommon for businesses to use debt to their advantage.
In the case of Shree Cement, the company’s net debt is ₹55.5b, with ₹10.5b of debt and ₹65.9b in cash as of March 2025. The balance sheet also shows liabilities of ₹57.6b due within 12 months and ₹11.6b due beyond 12 months, with ₹23.8b more liquid assets than total liabilities. This surplus indicates that Shree Cement has a conservative balance sheet and could likely eliminate its debt without much difficulty.
The company’s modest debt load may become crucial if management is unable to prevent a repeat of the 38% cut to EBIT over the last year. When a company’s earnings decline, its relationships with lenders can become strained. Therefore, it is essential to consider future earnings when analyzing debt levels, as they will determine the company’s ability to maintain a healthy balance sheet.
Shree Cement’s ability to convert its earnings before interest and tax (EBIT) to free cash flow is also a concern, with the company generating free cash flow amounting to only 5.3% of its EBIT in the last three years. This low cash conversion rate sparks some paranoia about the company’s ability to manage debt. However, the company’s net cash position and conservative balance sheet suggest that its debt use is not a significant concern.
In conclusion, while debt can be a problem for companies, Shree Cement’s net cash position and conservative balance sheet indicate that its debt use is not a significant concern. The company’s ability to convert EBIT to free cash flow is a concern, but its net cash position and modest debt load suggest that it is well-equipped to manage its debt. As with any investment, it is essential to consider multiple factors, including the balance sheet, future earnings, and cash flow, when evaluating the risk profile of a company like Shree Cement.