Is HBL Engineering (NSE:HBLENGINE) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies HBL Engineering Limited (NSE:HBLENGINE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 HBL Engineering

How Much Debt Does HBL Engineering Carry?

The image below, which you can click on for greater detail, shows that HBL Engineering had debt of ₹559.3m at the end of September 2024, a reduction from ₹990.9m over a year. However, it does have ₹2.10b in cash offsetting this, leading to net cash of ₹1.54b.

How Healthy Is HBL Engineering's Balance Sheet?

According to the last reported balance sheet, HBL Engineering had liabilities of ₹4.40b due within 12 months, and liabilities of ₹299.9m due beyond 12 months. On the other hand, it had cash of ₹2.10b and ₹3.81b worth of receivables due within a year. So it can boast ₹1.22b more liquid assets than total liabilities.

Having regard to HBL Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹152.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that HBL Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, HBL Engineering grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is HBL Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HBL Engineering 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. Looking at the most recent three years, HBL Engineering recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case HBL Engineering has ₹1.54b in net cash and a decent-looking balance sheet. And we liked the look of last year's 88% year-on-year EBIT growth. So we don't think HBL Engineering's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in HBL Engineering, you may well want to click here to check an interactive graph of its earnings per share history.

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.