Hindustan Copper (NSE:HINDCOPPER) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hindustan Copper Limited (NSE:HINDCOPPER) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hindustan Copper

What Is Hindustan Copper's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hindustan Copper had ₹915.0m of debt in September 2024, down from ₹2.91b, one year before. However, it does have ₹1.43b in cash offsetting this, leading to net cash of ₹512.3m.

How Healthy Is Hindustan Copper's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hindustan Copper had liabilities of ₹6.63b due within 12 months and liabilities of ₹3.15b due beyond that. Offsetting this, it had ₹1.43b in cash and ₹185.2m in receivables that were due within 12 months. So its liabilities total ₹8.17b more than the combination of its cash and short-term receivables.

Since publicly traded Hindustan Copper shares are worth a total of ₹205.3b, 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. Despite its noteworthy liabilities, Hindustan Copper boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hindustan Copper grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hindustan Copper'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hindustan Copper 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. In the last three years, Hindustan Copper's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Hindustan Copper's liabilities, but we can be reassured by the fact it has has net cash of ₹512.3m. And it impressed us with its EBIT growth of 45% over the last year. So we don't think Hindustan Copper's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Hindustan Copper , and understanding them should be part of your investment process.

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.