Hindustan Copper (NSE:HINDCOPPER) Is Carrying A Fair Bit Of 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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

Check out our latest analysis for Hindustan Copper

What Is Hindustan Copper's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Hindustan Copper had ₹14.7b of debt, an increase on ₹12.9b, over one year. On the flip side, it has ₹688.5m in cash leading to net debt of about ₹14.0b.

A Look At Hindustan Copper's Liabilities

Zooming in on the latest balance sheet data, we can see that Hindustan Copper had liabilities of ₹12.1b due within 12 months and liabilities of ₹8.72b due beyond that. Offsetting these obligations, it had cash of ₹688.5m as well as receivables valued at ₹1.68b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹18.5b.

Of course, Hindustan Copper has a market capitalization of ₹107.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hindustan Copper will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hindustan Copper reported revenue of ₹14b, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Hindustan Copper managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹2.8b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹990m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Hindustan Copper (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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