Hindustan Zinc (NSE:HINDZINC) Has A Rock Solid Balance Sheet

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 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. Importantly, Hindustan Zinc Limited (NSE:HINDZINC) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hindustan Zinc

What Is Hindustan Zinc's Debt?

As you can see below, at the end of March 2021, Hindustan Zinc had ₹72.0b of debt, up from ₹6.11b a year ago. Click the image for more detail. But on the other hand it also has ₹223.1b in cash, leading to a ₹151.1b net cash position.

A Look At Hindustan Zinc's Liabilities

According to the last reported balance sheet, Hindustan Zinc had liabilities of ₹78.8b due within 12 months, and liabilities of ₹55.4b due beyond 12 months. Offsetting these obligations, it had cash of ₹223.1b as well as receivables valued at ₹5.02b due within 12 months. So it actually has ₹94.0b more liquid assets than total liabilities.

This surplus suggests that Hindustan Zinc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hindustan Zinc has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Hindustan Zinc grew its EBIT by 95% 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 Zinc'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 Zinc 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 Zinc produced sturdy free cash flow equating to 65% 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 investigate a company's debt, in this case Hindustan Zinc has ₹151.1b in net cash and a decent-looking balance sheet. And we liked the look of last year's 95% year-on-year EBIT growth. So is Hindustan Zinc's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Hindustan Zinc (at least 1 which is a bit concerning) , 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.
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