We think Hindustan Zinc (NSE:HINDZINC) can manage debt with ease

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Hindustan Zinc Limited (NSE:HINDZINC) uses debt. But does this debt worry shareholders?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business 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 review for Hindustan Zinc

What is Hindustan Zinc’s debt?

You can click on the graph below for historical figures, but it shows that Hindustan Zinc had a debt of ₹31.2 billion in March 2022, up from ₹72.0 billion a year before. But on the other hand, it also has ₹172.9 billion in cash, resulting in a net cash position of ₹141.7 billion.

NSEI: HINDZINC Debt to Equity History September 14, 2022

A Look at Hindustan Zinc’s Responsibilities

According to the latest published balance sheet, Hindustan Zinc had liabilities of ₹60.9 billion due within 12 months and liabilities of ₹43.0 billion due beyond 12 months. In return, he had ₹172.9 billion in cash and ₹8.28 billion in receivables due within 12 months. So he actually has ₹77.3 billion After liquid assets than total liabilities.

This short-term liquidity is a sign that Hindustan Zinc could probably easily repay its debt, as its balance sheet is far from stretched. In short, Hindustan Zinc has a net cash position, so it’s fair to say that they don’t have a lot of debt!

On top of that, we are pleased to report that Hindustan Zinc has increased its EBIT by 35%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Hindustan Zinc that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Hindustan Zinc has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it is building ( or erodes) this treasury. balance. Over the past three years, Hindustan Zinc has produced strong free cash flow equivalent to 69% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Summary

While it is always a good idea to investigate a company’s debt, in this case Hindustan Zinc has ₹141.7 billion in net cash and a decent looking balance sheet. And we liked the look of EBIT growth of 35% YoY last year. So is Hindustan Zinc’s debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Hindustan Zinc (of which 1 does not suit us too much!) that you should know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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