HEG (NSE:HEG) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that HEG Limited (NSE:HEG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HEG

How Much Debt Does HEG Carry?

The image below, which you can click on for greater detail, shows that HEG had debt of ₹6.19b at the end of March 2024, a reduction from ₹7.41b over a year. But it also has ₹7.34b in cash to offset that, meaning it has ₹1.14b net cash.

How Strong Is HEG's Balance Sheet?

We can see from the most recent balance sheet that HEG had liabilities of ₹11.7b falling due within a year, and liabilities of ₹1.08b due beyond that. Offsetting this, it had ₹7.34b in cash and ₹5.09b in receivables that were due within 12 months. So its liabilities total ₹326.8m more than the combination of its cash and short-term receivables.

Having regard to HEG's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹84.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, HEG boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that HEG's EBIT was down 60% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HEG'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While HEG has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HEG saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about HEG's liabilities, but we can be reassured by the fact it has has net cash of ₹1.14b. So although we see some areas for improvement, we're not too worried about HEG's balance sheet. 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. For example - HEG has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.