Is Hilton Metal Forging (NSE:HILTON) Weighed On By Its Debt Load?

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, Hilton Metal Forging Limited (NSE:HILTON) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hilton Metal Forging

How Much Debt Does Hilton Metal Forging Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Hilton Metal Forging had debt of ₹564.2m, up from ₹415.4m in one year. However, it does have ₹193.3m in cash offsetting this, leading to net debt of about ₹370.9m.

A Look At Hilton Metal Forging's Liabilities

Zooming in on the latest balance sheet data, we can see that Hilton Metal Forging had liabilities of ₹553.8m due within 12 months and liabilities of ₹201.5m due beyond that. Offsetting these obligations, it had cash of ₹193.3m as well as receivables valued at ₹63.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹498.2m.

This deficit casts a shadow over the ₹190.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Hilton Metal Forging would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hilton Metal Forging 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 Hilton Metal Forging had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₹642m. To be frank that doesn't bode well.

Caveat Emptor

While Hilton Metal Forging's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹67m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹79m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 instance, we've identified 3 warning signs for Hilton Metal Forging (2 are concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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