These 4 Measures Indicate That Hero MotoCorp (NSE:HEROMOTOCO) Is Using Debt Safely

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.' 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 Hero MotoCorp Limited (NSE:HEROMOTOCO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hero MotoCorp

What Is Hero MotoCorp's Net Debt?

As you can see below, Hero MotoCorp had ₹3.57b of debt at September 2024, down from ₹4.01b a year prior. However, its balance sheet shows it holds ₹75.1b in cash, so it actually has ₹71.5b net cash.

A Look At Hero MotoCorp's Liabilities

We can see from the most recent balance sheet that Hero MotoCorp had liabilities of ₹87.0b falling due within a year, and liabilities of ₹14.2b due beyond that. Offsetting this, it had ₹75.1b in cash and ₹41.4b in receivables that were due within 12 months. So it actually has ₹15.2b more liquid assets than total liabilities.

Having regard to Hero MotoCorp's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹953.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Hero MotoCorp has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Hero MotoCorp has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 last three years, Hero MotoCorp recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hero MotoCorp has ₹71.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹58b, being 86% of its EBIT. So we don't think Hero MotoCorp's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Hero MotoCorp that you should be aware of before investing here.

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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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.