We believe that HG Infra Engineering (NSE: HGINFRA) can stay on top of its debt

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Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, HG Infra Engineering Limited (NSE: HGINFRA) bears the debt. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. 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 in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for HG Infra Engineering

What is the debt of HG Infra Engineering?

The image below, which you can click for more details, shows that in March 2021, HG Infra Engineering was in debt of 6.89 billion yen, up from 5.16 billion yen in a year. On the other hand, it has 5.94 billion yen in cash, resulting in net debt of around 947.9 million yen.

NSEI: HGINFRA History of debt to equity May 18, 2021

How healthy is HG Infra Engineering’s balance sheet?

The latest balance sheet data shows that HG Infra Engineering had liabilities of 9.74 billion yen due within one year, and liabilities of 6.47 billion yen due thereafter. In compensation for these obligations, he had cash of 5.94 billion euros as well as receivables valued at 8.48 billion euros within 12 months. It therefore has liabilities totaling 1.79 billion yen more than its combined cash and short-term receivables.

Considering that HG Infra Engineering has a market capitalization of 21.7 billion yen, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.

We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

While HG Infra Engineering’s low debt-to-EBITDA ratio of 0.19 suggests only a modest use of debt, the fact that EBIT only covered interest costs 4.3 times a year last makes us think. But the interest payments are certainly enough to make us think about how affordable his debt is. It is important to note that HG Infra Engineering has increased its EBIT by 41% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether HG Infra Engineering can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the tax authorities love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. In the last three years, HG Infra Engineering has recorded a total negative free cash flow. Debt is generally more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.

Our point of view

The ability of HG Infra Engineering to increase its EBIT and net debt relative to EBITDA has reinforced our ability to manage its debt. But the truth is, its conversion from EBIT to free cash flow made our fingernails bite. Given this range of data points, we believe HG Infra Engineering is well positioned to manage its debt levels. But beware: we believe debt levels are high enough to warrant continued monitoring. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that HG Infra Engineering watch 3 warning signs in our investment analysis , and 2 of them are a bit disturbing …

Of course, if you are the type of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

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