We Think Hindustan Copper (NSE:HINDCOPPER) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hindustan Copper Limited (NSE:HINDCOPPER) does carry 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hindustan Copper

How Much Debt Does Hindustan Copper Carry?

As you can see below, Hindustan Copper had ₹1.49b of debt at March 2023, down from ₹4.08b a year prior. But on the other hand it also has ₹3.01b in cash, leading to a ₹1.52b net cash position.

A Look At Hindustan Copper's Liabilities

Zooming in on the latest balance sheet data, we can see that Hindustan Copper had liabilities of ₹8.38b due within 12 months and liabilities of ₹649.6m due beyond that. Offsetting this, it had ₹3.01b in cash and ₹661.5m in receivables that were due within 12 months. So it has liabilities totalling ₹5.36b more than its cash and near-term receivables, combined.

Of course, Hindustan Copper has a market capitalization of ₹153.8b, 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. While it does have liabilities worth noting, Hindustan Copper also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Hindustan Copper's load is not too heavy, because its EBIT was down 27% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Hindustan Copper actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 ₹1.52b. And it impressed us with free cash flow of ₹3.3b, being 131% of its EBIT. So we are not troubled with Hindustan Copper's debt use. 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 Copper that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.