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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. 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 note that Hindustan Oil Exploration Company Limited (NSE:HINDOILEXP) 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Hindustan Oil Exploration
What Is Hindustan Oil Exploration's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Hindustan Oil Exploration had ₹120.1m of debt, an increase on ₹3.15m, over one year. However, its balance sheet shows it holds ₹1.47b in cash, so it actually has ₹1.35b net cash.
How Strong Is Hindustan Oil Exploration's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hindustan Oil Exploration had liabilities of ₹658.0m due within 12 months and liabilities of ₹1.28b due beyond that. Offsetting this, it had ₹1.47b in cash and ₹506.6m in receivables that were due within 12 months. So it can boast ₹41.3m more liquid assets than total liabilities.
Having regard to Hindustan Oil Exploration's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹13.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hindustan Oil Exploration boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Hindustan Oil Exploration grew its EBIT by 193% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hindustan Oil Exploration will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.