Hindustan Zinc (NSE:HINDZINC) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Hindustan Zinc Limited (NSE:HINDZINC) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Zinc

What Is Hindustan Zinc's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Hindustan Zinc had ₹64.7b of debt, an increase on ₹6.11b, over one year. But on the other hand it also has ₹223.9b in cash, leading to a ₹159.2b net cash position.

How Strong Is Hindustan Zinc's Balance Sheet?

The latest balance sheet data shows that Hindustan Zinc had liabilities of ₹78.8b due within a year, and liabilities of ₹55.4b falling due after that. Offsetting this, it had ₹223.9b in cash and ₹4.08b in receivables that were due within 12 months. So it can boast ₹93.8b 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. Succinctly put, Hindustan Zinc boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hindustan Zinc grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Hindustan Zinc's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 67% 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 ₹159.2b in net cash and a decent-looking balance sheet. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Hindustan Zinc's use of debt 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. Case in point: We've spotted 2 warning signs for Hindustan Zinc you should be aware of, and 1 of them shouldn't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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