Health Check: How Prudently Does HEG (NSE:HEG) Use 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.' 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. Importantly, HEG Limited (NSE:HEG) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HEG

What Is HEG's Debt?

As you can see below, HEG had ₹2.98b of debt at March 2021, down from ₹5.94b a year prior. However, it does have ₹10.5b in cash offsetting this, leading to net cash of ₹7.54b.

How Strong Is HEG's Balance Sheet?

The latest balance sheet data shows that HEG had liabilities of ₹6.44b due within a year, and liabilities of ₹1.05b falling due after that. Offsetting these obligations, it had cash of ₹10.5b as well as receivables valued at ₹3.15b due within 12 months. So it can boast ₹6.18b more liquid assets than total liabilities.

This surplus suggests that HEG has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HEG has more cash than debt is arguably a good indication that it can manage its debt safely. 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 8.3%, to ₹14b. That's not what we would hope to see.

So How Risky Is HEG?

Although HEG had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹245m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - HEG has 1 warning sign we think you should be aware of.

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.
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