Does HLV (NSE:HLVLTD) Have A Healthy Balance Sheet?

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. We note that HLV Limited (NSE:HLVLTD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HLV

How Much Debt Does HLV Carry?

The chart below, which you can click on for greater detail, shows that HLV had ₹327.1m in debt in March 2024; about the same as the year before. But on the other hand it also has ₹1.14b in cash, leading to a ₹813.2m net cash position.

A Look At HLV's Liabilities

Zooming in on the latest balance sheet data, we can see that HLV had liabilities of ₹1.10b due within 12 months and liabilities of ₹263.7m due beyond that. Offsetting this, it had ₹1.14b in cash and ₹204.2m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to HLV's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹11.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, HLV boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, HLV is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 203% gain in the last twelve months. 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 HLV will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HLV 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. Happily for any shareholders, HLV actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about HLV's liabilities, but we can be reassured by the fact it has has net cash of ₹813.2m. The cherry on top was that in converted 323% of that EBIT to free cash flow, bringing in ₹238m. So we don't think HLV's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of HLV's earnings per share history for free.

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. 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.