Is Hindustan Zinc (NSE:HINDZINC) Using Too Much 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. We can see that Hindustan Zinc Limited (NSE:HINDZINC) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Hindustan Zinc

What Is Hindustan Zinc's Net Debt?

As you can see below, Hindustan Zinc had ₹88.6b of debt at March 2024, down from ₹121.5b a year prior. However, its balance sheet shows it holds ₹100.5b in cash, so it actually has ₹11.9b net cash.

A Look At Hindustan Zinc's Liabilities

The latest balance sheet data shows that Hindustan Zinc had liabilities of ₹108.4b due within a year, and liabilities of ₹78.6b falling due after that. On the other hand, it had cash of ₹100.5b and ₹1.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹85.0b.

Given Hindustan Zinc has a humongous market capitalization of ₹3.14t, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hindustan Zinc also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Hindustan Zinc's load is not too heavy, because its EBIT was down 28% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hindustan Zinc's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hindustan Zinc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Hindustan Zinc recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Hindustan Zinc's liabilities, but we can be reassured by the fact it has has net cash of ₹11.9b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₹95b. So we don't have any problem with Hindustan Zinc's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hindustan Zinc that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.