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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Hindustan Zinc Limited (NSE:HINDZINC) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 Hindustan Zinc had ₹31.2b of debt in March 2022, down from ₹72.0b, one year before. But on the other hand it also has ₹172.9b in cash, leading to a ₹141.7b net cash position.

A Look At Hindustan Zinc's Liabilities

According to the last reported balance sheet, Hindustan Zinc had liabilities of ₹60.9b due within 12 months, and liabilities of ₹43.0b due beyond 12 months. Offsetting this, it had ₹172.9b in cash and ₹8.28b in receivables that were due within 12 months. So it actually has ₹77.3b 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. Succinctly put, Hindustan Zinc boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Hindustan Zinc has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Hindustan Zinc produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. 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 ₹141.7b in net cash and a decent-looking balance sheet. And we liked the look of last year's 35% year-on-year EBIT growth. So is Hindustan Zinc's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hindustan Zinc (of which 1 doesn't sit too well with us!) you should know about.

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.