These 4 Measures Indicate That HBL Engineering (NSE:HBLENGINE) Is Using Debt Reasonably Well

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 note that HBL Engineering Limited (NSE:HBLENGINE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is HBL Engineering's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2025 HBL Engineering had debt of ₹743.0m, up from ₹674.6m in one year. However, it does have ₹2.23b in cash offsetting this, leading to net cash of ₹1.49b.

A Look At HBL Engineering's Liabilities

Zooming in on the latest balance sheet data, we can see that HBL Engineering had liabilities of ₹4.26b due within 12 months and liabilities of ₹710.6m due beyond that. On the other hand, it had cash of ₹2.23b and ₹3.73b worth of receivables due within a year. So it actually has ₹995.2m more liquid assets than total liabilities.

This state of affairs indicates that HBL Engineering'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 ₹232.5b company is struggling for cash, we still think it's worth monitoring its 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.

Check out our latest analysis for HBL Engineering

The good news is that HBL Engineering has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HBL Engineering will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 32% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case HBL Engineering has ₹1.49b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 3.7% in the last twelve months. So we don't have any problem with HBL Engineering's use of debt. 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.