HLV (NSE:HLVLTD) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies HLV Limited (NSE:HLVLTD) makes use of debt. But is this debt a concern to shareholders?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does HLV Carry?

As you can see below, at the end of March 2025, HLV had ₹410.6m of debt, up from ₹327.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.38b in cash, so it actually has ₹972.6m net cash.

How Strong Is HLV's Balance Sheet?

According to the last reported balance sheet, HLV had liabilities of ₹1.31b due within 12 months, and liabilities of ₹332.8m due beyond 12 months. On the other hand, it had cash of ₹1.38b and ₹188.0m worth of receivables due within a year. So its liabilities total ₹67.3m more than the combination of its cash and short-term receivables.

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 ₹7.90b 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!

View our latest analysis for HLV

Shareholders should be aware that HLV's EBIT was down 25% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is HLV's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 three 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 ₹972.6m. The cherry on top was that in converted 299% of that EBIT to free cash flow, bringing in ₹227m. So we are not troubled with HLV's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - HLV has 1 warning sign 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.