Would Hindustan Copper (NSE:HINDCOPPER) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Hindustan Copper Limited (NSE:HINDCOPPER) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hindustan Copper

How Much Debt Does Hindustan Copper Carry?

As you can see below, at the end of March 2020, Hindustan Copper had ₹15.6b of debt, up from ₹10.7b a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Hindustan Copper's Balance Sheet?

According to the last reported balance sheet, Hindustan Copper had liabilities of ₹14.5b due within 12 months, and liabilities of ₹7.10b due beyond 12 months. Offsetting these obligations, it had cash of ₹159.7m as well as receivables valued at ₹1.01b due within 12 months. So its liabilities total ₹20.4b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hindustan Copper has a market capitalization of ₹34.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Hindustan Copper'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.

Over 12 months, Hindustan Copper made a loss at the EBIT level, and saw its revenue drop to ₹8.9b, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

While Hindustan Copper's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹4.8b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹3.5b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 4 warning signs for Hindustan Copper you should be aware of, and 2 of them are potentially serious.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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