Does HEG (NSE:HEG) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 HEG Limited (NSE:HEG) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 HEG

What Is HEG's Debt?

You can click the graphic below for the historical numbers, but it shows that HEG had ₹2.39b of debt in September 2020, down from ₹6.42b, one year before. But it also has ₹7.57b in cash to offset that, meaning it has ₹5.18b net cash.

How Strong Is HEG's Balance Sheet?

The latest balance sheet data shows that HEG had liabilities of ₹4.71b due within a year, and liabilities of ₹969.1m falling due after that. Offsetting this, it had ₹7.57b in cash and ₹2.62b in receivables that were due within 12 months. So it can boast ₹4.51b more liquid assets than total liabilities.

This short term liquidity is a sign that HEG could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, HEG boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HEG 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.

In the last year HEG had a loss before interest and tax, and actually shrunk its revenue by 71%, to ₹13b. That makes us nervous, to say the least.

So How Risky Is HEG?

Although HEG had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹5.9b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that HEG is showing 1 warning sign in our investment analysis , you should know about...

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. 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.
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