Is Huhtamaki India (NSE:HUHTAMAKI) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Huhtamaki India Limited (NSE:HUHTAMAKI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Huhtamaki India

What Is Huhtamaki India's Net Debt?

As you can see below, Huhtamaki India had ₹2.55b of debt at December 2023, down from ₹4.10b a year prior. But it also has ₹3.91b in cash to offset that, meaning it has ₹1.37b net cash.

How Healthy Is Huhtamaki India's Balance Sheet?

We can see from the most recent balance sheet that Huhtamaki India had liabilities of ₹5.85b falling due within a year, and liabilities of ₹2.65b due beyond that. Offsetting this, it had ₹3.91b in cash and ₹5.64b in receivables that were due within 12 months. So it actually has ₹1.04b more liquid assets than total liabilities.

This surplus suggests that Huhtamaki India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Huhtamaki India boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Huhtamaki India grew its EBIT by 81% 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 future earnings, more than anything, that will determine Huhtamaki India'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Huhtamaki India 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, Huhtamaki India recorded free cash flow worth 75% 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 we empathize with investors who find debt concerning, you should keep in mind that Huhtamaki India has net cash of ₹1.37b, as well as more liquid assets than liabilities. And we liked the look of last year's 81% year-on-year EBIT growth. So we don't think Huhtamaki India's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Huhtamaki India you should be aware of, and 1 of them doesn't sit too well with us.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.