Is Hero MotoCorp (NSE:HEROMOTOCO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hero MotoCorp Limited (NSE:HEROMOTOCO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hero MotoCorp

What Is Hero MotoCorp's Debt?

You can click the graphic below for the historical numbers, but it shows that Hero MotoCorp had ₹3.13b of debt in March 2023, down from ₹6.05b, one year before. But on the other hand it also has ₹40.4b in cash, leading to a ₹37.2b net cash position.

How Strong Is Hero MotoCorp's Balance Sheet?

The latest balance sheet data shows that Hero MotoCorp had liabilities of ₹60.1b due within a year, and liabilities of ₹11.2b falling due after that. Offsetting this, it had ₹40.4b in cash and ₹33.2b in receivables that were due within 12 months. So it can boast ₹2.19b more liquid assets than total liabilities.

This state of affairs indicates that Hero MotoCorp's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹598.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hero MotoCorp boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Hero MotoCorp grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hero MotoCorp can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hero MotoCorp 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. Over the most recent three years, Hero MotoCorp recorded free cash flow worth 52% 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 we empathize with investors who find debt concerning, you should keep in mind that Hero MotoCorp has net cash of ₹37.2b, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. 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. We've identified 1 warning sign with Hero MotoCorp , and understanding them should be part of your investment process.

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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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.