Is Hindustan Unilever (NSE:HINDUNILVR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Hindustan Unilever Limited (NSE:HINDUNILVR) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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 Unilever

How Much Debt Does Hindustan Unilever Carry?

As you can see below, at the end of March 2023, Hindustan Unilever had ₹980.0m of debt, up from none a year ago. Click the image for more detail. However, it does have ₹72.7b in cash offsetting this, leading to net cash of ₹71.7b.

A Look At Hindustan Unilever's Liabilities

According to the last reported balance sheet, Hindustan Unilever had liabilities of ₹120.3b due within 12 months, and liabilities of ₹105.4b due beyond 12 months. On the other hand, it had cash of ₹72.7b and ₹38.7b worth of receivables due within a year. So it has liabilities totalling ₹114.4b more than its cash and near-term receivables, combined.

This state of affairs indicates that Hindustan Unilever's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹6.29t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Hindustan Unilever boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Hindustan Unilever grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hindustan Unilever'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hindustan Unilever has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Hindustan Unilever produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hindustan Unilever has ₹71.7b in net cash. So is Hindustan Unilever's debt a risk? It doesn't seem so to us. 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 1 warning sign for Hindustan Unilever that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.