Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that Mangalam Cement Limited (NSE: MANGLMCEM) has a debt on its balance sheet. But should shareholders be worried about its use of debt?
What risk does debt entail?
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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
See our latest review for Mangalam Cement
What is Mangalam Cement’s debt?
You can click on the graph below for historical figures, but it shows that Mangalam Cement had 5.26 billion yen in debt in March 2021, up from 5.84 billion yen a year earlier. However, it has 2.99 billion yen in cash offsetting this, which leads to net debt of around 2.27 billion yen.
How strong is Mangalam Cement’s balance sheet?
According to the latest published balance sheet, Mangalam Cement had liabilities of 5.85 billion yen due within 12 months and commitments of 5.76 billion yen due beyond 12 months. On the other hand, he had cash of 2.99 billion yen and 1.36 billion yen in receivables due within a year. Its liabilities are therefore 7.26 billion euros more than the combination of its cash and short-term receivables.
This deficit is substantial compared to its market capitalization of 9.66 billion euros, so he suggests shareholders keep an eye on Mangalam Cement’s use of debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While Mangalam Cement’s low debt-to-EBITDA ratio of 0.88 suggests only a modest use of debt, the fact that EBIT only covered interest expense 3.1 times last year we makes think. We therefore recommend that you keep a close eye on the impact of financing costs on the business. Importantly, Mangalam Cement has increased its EBIT by 33% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Mangalam Cement will need income to repay this debt. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
But our last consideration is also important, because a company 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. Over the past three years, Mangalam Cement has recorded free cash flow representing 57% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
As far as the balance sheet is concerned, the most salient positive point for Mangalam Cement is the fact that it appears capable of growing its EBIT with confidence. However, our other observations were not so encouraging. For example, his interest coverage makes us a little nervous about his debt. Given this range of data points, we believe Mangalam Cement is well positioned to manage its debt levels. But beware: we believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with Mangalam Cement.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.
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