Does Hindustan Aeronautics (NSE:HAL) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hindustan Aeronautics Limited (NSE:HAL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hindustan Aeronautics

How Much Debt Does Hindustan Aeronautics Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Hindustan Aeronautics had debt of ₹516.9m, up from ₹492.7m in one year. But it also has ₹203.0b in cash to offset that, meaning it has ₹202.5b net cash.

How Healthy Is Hindustan Aeronautics' Balance Sheet?

According to the last reported balance sheet, Hindustan Aeronautics had liabilities of ₹308.3b due within 12 months, and liabilities of ₹128.0b due beyond 12 months. On the other hand, it had cash of ₹203.0b and ₹152.2b worth of receivables due within a year. So its liabilities total ₹81.0b more than the combination of its cash and short-term receivables.

Since publicly traded Hindustan Aeronautics shares are worth a very impressive total of ₹1.29t, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hindustan Aeronautics boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hindustan Aeronautics grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hindustan Aeronautics'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. Hindustan Aeronautics 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. Happily for any shareholders, Hindustan Aeronautics actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hindustan Aeronautics has ₹202.5b in net cash. The cherry on top was that in converted 256% of that EBIT to free cash flow, bringing in ₹70b. So we don't think Hindustan Aeronautics's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Hindustan Aeronautics that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.