Does Hindustan Unilever (NSE:HINDUNILVR) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Hindustan Unilever Limited (NSE:HINDUNILVR) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Our analysis indicates that HINDUNILVR is potentially overvalued!

What Is Hindustan Unilever's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Hindustan Unilever had ₹1.05b of debt, an increase on ₹550.0m, over one year. However, its balance sheet shows it holds ₹74.9b in cash, so it actually has ₹73.8b net cash.

How Strong Is Hindustan Unilever's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hindustan Unilever had liabilities of ₹124.3b due within 12 months and liabilities of ₹98.7b due beyond that. On the other hand, it had cash of ₹74.9b and ₹26.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹121.5b.

Since publicly traded Hindustan Unilever shares are worth a very impressive total of ₹5.88t, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hindustan Unilever also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Hindustan Unilever grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hindustan Unilever can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hindustan Unilever 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. During the last three years, Hindustan Unilever produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hindustan Unilever has ₹73.8b in net cash. And it also grew its EBIT by 13% over the last year. So we don't think Hindustan Unilever's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Hindustan Unilever that you should be aware of.

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.