Is Hathway Cable and Datacom (NSE:HATHWAY) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hathway Cable and Datacom Limited (NSE:HATHWAY) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hathway Cable and Datacom

How Much Debt Does Hathway Cable and Datacom Carry?

The chart below, which you can click on for greater detail, shows that Hathway Cable and Datacom had ₹19.5b in debt in March 2020; about the same as the year before. However, its balance sheet shows it holds ₹32.8b in cash, so it actually has ₹13.2b net cash.

How Healthy Is Hathway Cable and Datacom's Balance Sheet?

We can see from the most recent balance sheet that Hathway Cable and Datacom had liabilities of ₹25.3b falling due within a year, and liabilities of ₹1.01b due beyond that. On the other hand, it had cash of ₹32.8b and ₹2.69b worth of receivables due within a year. So it actually has ₹9.17b more liquid assets than total liabilities.

It's good to see that Hathway Cable and Datacom has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hathway Cable and Datacom boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Hathway Cable and Datacom grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Hathway Cable and Datacom's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hathway Cable and Datacom has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Hathway Cable and Datacom recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Hathway Cable and Datacom has ₹13.2b in net cash and a decent-looking balance sheet. And we liked the look of last year's 73% year-on-year EBIT growth. So we don't think Hathway Cable and Datacom's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Hathway Cable and Datacom (at least 1 which is significant) , and understanding them should be part of your investment process.

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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