We Think Hindustan Zinc (NSE:HINDZINC) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Hindustan Zinc Limited (NSE:HINDZINC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hindustan Zinc

How Much Debt Does Hindustan Zinc Carry?

You can click the graphic below for the historical numbers, but it shows that Hindustan Zinc had ₹28.2b of debt in March 2022, down from ₹71.8b, one year before. But on the other hand it also has ₹208.2b in cash, leading to a ₹179.9b net cash position.

How Healthy Is Hindustan Zinc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hindustan Zinc had liabilities of ₹60.9b due within 12 months and liabilities of ₹43.0b due beyond that. Offsetting these obligations, it had cash of ₹208.2b as well as receivables valued at ₹7.18b due within 12 months. So it can boast ₹111.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Hindustan Zinc could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 45% 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 you can't view debt in total isolation; since Hindustan Zinc 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.

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 most recent three years, Hindustan Zinc recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Hindustan Zinc has ₹179.9b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 45% over the last year. So we don't think Hindustan Zinc's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Hindustan Zinc you should be aware of, and 1 of them is significant.

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.