Is Hindustan Copper (NSE:HINDCOPPER) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Hindustan Copper Limited (NSE:HINDCOPPER) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hindustan Copper

What Is Hindustan Copper's Net Debt?

As you can see below, at the end of September 2020, Hindustan Copper had ₹14.7b of debt, up from ₹12.9b a year ago. Click the image for more detail. However, it does have ₹688.5m in cash offsetting this, leading to net debt of about ₹14.0b.

How Strong Is Hindustan Copper's Balance Sheet?

The latest balance sheet data shows that Hindustan Copper had liabilities of ₹12.1b due within a year, and liabilities of ₹8.72b falling due after that. Offsetting these obligations, it had cash of ₹688.5m as well as receivables valued at ₹1.68b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹18.5b.

While this might seem like a lot, it is not so bad since Hindustan Copper has a market capitalization of ₹32.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hindustan Copper's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hindustan Copper had a loss before interest and tax, and actually shrunk its revenue by 37%, to ₹9.8b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hindustan Copper's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹5.3b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹990m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Hindustan Copper you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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