Hindustan Media Ventures (NSE:HMVL) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hindustan Media Ventures Limited (NSE:HMVL) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hindustan Media Ventures

What Is Hindustan Media Ventures's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Hindustan Media Ventures had ₹955.4m of debt, an increase on ₹745.4m, over one year. However, its balance sheet shows it holds ₹3.61b in cash, so it actually has ₹2.65b net cash.

How Strong Is Hindustan Media Ventures's Balance Sheet?

We can see from the most recent balance sheet that Hindustan Media Ventures had liabilities of ₹3.27b falling due within a year, and liabilities of ₹802.5m due beyond that. On the other hand, it had cash of ₹3.61b and ₹1.68b worth of receivables due within a year. So it actually has ₹1.21b more liquid assets than total liabilities.

This surplus liquidity suggests that Hindustan Media Ventures's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Hindustan Media Ventures boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Hindustan Media Ventures grew its EBIT by 102% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hindustan Media Ventures will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hindustan Media Ventures may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hindustan Media Ventures produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Hindustan Media Ventures has ₹2.65b in net cash and a decent-looking balance sheet. And we liked the look of last year's 102% year-on-year EBIT growth. So is Hindustan Media Ventures's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Hindustan Media Ventures (of which 1 is a bit concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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