Is Hero MotoCorp (NSE:HEROMOTOCO) 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. We can see that Hero MotoCorp Limited (NSE:HEROMOTOCO) does use debt in its business. 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hero MotoCorp

What Is Hero MotoCorp's Net Debt?

The image below, which you can click on for greater detail, shows that Hero MotoCorp had debt of ₹6.51b at the end of September 2023, a reduction from ₹7.27b over a year. But on the other hand it also has ₹36.3b in cash, leading to a ₹29.8b net cash position.

A Look At Hero MotoCorp's Liabilities

The latest balance sheet data shows that Hero MotoCorp had liabilities of ₹73.5b due within a year, and liabilities of ₹11.6b falling due after that. Offsetting this, it had ₹36.3b in cash and ₹42.5b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹6.34b.

Having regard to Hero MotoCorp's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹931.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Hero MotoCorp also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Hero MotoCorp has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hero MotoCorp's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hero MotoCorp 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, Hero MotoCorp recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hero MotoCorp has ₹29.8b in net cash. And it impressed us with its EBIT growth of 39% over the last year. So is Hero MotoCorp's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hero MotoCorp you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.