Is Hubtown (NSE:HUBTOWN) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Hubtown Limited (NSE:HUBTOWN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hubtown

What Is Hubtown's Net Debt?

As you can see below, at the end of September 2022, Hubtown had ₹8.86b of debt, up from ₹4.81b a year ago. Click the image for more detail. However, it also had ₹441.6m in cash, and so its net debt is ₹8.41b.

A Look At Hubtown's Liabilities

According to the last reported balance sheet, Hubtown had liabilities of ₹29.3b due within 12 months, and liabilities of ₹4.08b due beyond 12 months. Offsetting these obligations, it had cash of ₹441.6m as well as receivables valued at ₹3.25b due within 12 months. So its liabilities total ₹29.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹4.28b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Hubtown would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hubtown'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.

Over 12 months, Hubtown made a loss at the EBIT level, and saw its revenue drop to ₹2.5b, which is a fall of 2.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, Hubtown had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹384m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹930m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Be aware that Hubtown is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.