Is Hindalco Industries Limited’s (NSE:HINDALCO) Balance Sheet Strong Enough To Weather A Storm?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Hindalco Industries Limited (NSEI:HINDALCO), with a market capitalization of ₹524.77B, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at HINDALCO’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HINDALCO here. See our latest analysis for Hindalco Industries
How does HINDALCO’s operating cash flow stack up against its debt?
HINDALCO has shrunken its total debt levels in the last twelve months, from ₹675.59B to ₹638.22B – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at ₹171.95B , ready to deploy into the business. Additionally, HINDALCO has produced cash from operations of ₹126.87B in the last twelve months, leading to an operating cash to total debt ratio of 19.88%, meaning that HINDALCO’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HINDALCO’s case, it is able to generate 0.2x cash from its debt capital.
Does HINDALCO’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹376.95B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹511.98B, with a current ratio of 1.36x. Generally, for Metals and Mining companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can HINDALCO service its debt comfortably?
HINDALCO is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In HINDALCO’s case, the ratio of 1.9x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
HINDALCO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure HINDALCO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Hindalco Industries to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HINDALCO’s future growth? Take a look at our free research report of analyst consensus for HINDALCO’s outlook.
Valuation: What is HINDALCO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HINDALCO is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
