UltraTech Cement (NSE: ULTRACEMCO) seems to use debt rather sparingly
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, UltraTech Cement Limited (NSE: ULTRACEMCO) is in debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for UltraTech Cement
What is UltraTech Cement’s net debt?
As you can see below, UltraTech Cement had 219.4 billion yen in debt in March 2021, up from 240.6 billion yen the year before. On the other hand, it has 148.0 billion yen in cash, resulting in net debt of around 71.4 billion yen.
A look at the liabilities of UltraTech Cement
The latest balance sheet data shows UltraTech Cement had liabilities of 205.9 billion yen due within one year, and liabilities of 214.1 billion yen due after that. In return, he had 148.0 billion yen in cash and 42.2 billion yen in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 229.8 b.
Of course, UltraTech Cement has a titanic market cap of 2.26 tonnes, so this liability is probably manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
UltraTech Cement has net debt of only 0.56 times EBITDA, indicating that it is certainly not a reckless borrower. And it has 7.1 times interest coverage, which is more than enough. On top of that, we are happy to report that UltraTech Cement has increased its EBIT by 74%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine UltraTech Cement’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, UltraTech Cement 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.
Our point of view
UltraTech Cement’s EBIT conversion to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Overall, we don’t think UltraTech Cement is taking bad risks, as its leverage appears modest. The balance sheet therefore seems rather healthy to us. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for UltraTech Cement you must be aware.
At the end of the day, it’s often best to focus on businesses with no 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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