Is Hindustan Petroleum (NSE:HINDPETRO) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Hindustan Petroleum Corporation Limited (NSE:HINDPETRO) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Hindustan Petroleum

How Much Debt Does Hindustan Petroleum Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Hindustan Petroleum had ₹670.5b of debt, an increase on ₹449.8b, over one year. However, it also had ₹58.4b in cash, and so its net debt is ₹612.1b.

How Healthy Is Hindustan Petroleum's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hindustan Petroleum had liabilities of ₹738.7b due within 12 months and liabilities of ₹552.1b due beyond that. Offsetting these obligations, it had cash of ₹58.4b as well as receivables valued at ₹70.0b due within 12 months. So its liabilities total ₹1.16t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹363.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Hindustan Petroleum would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hindustan Petroleum'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.

In the last year Hindustan Petroleum wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to ₹4.4t. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Hindustan Petroleum's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₹85b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₹129b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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, we've discovered 3 warning signs for Hindustan Petroleum (1 is a bit concerning!) that you should be aware of before investing here.

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.

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.