With a market capitalization of ₹687.98B, Hero MotoCorp Limited (NSEI:HEROMOTOCO) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Hero MotoCorp
Does HEROMOTOCO face the risk of succumbing to its debt-load?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. In the case of HEROMOTOCO, the debt-to-equity ratio is 2.51%, which means debt is low and does not pose any significant threat to the company’s operations.
Does HEROMOTOCO generate enough cash through operations?
A basic way to evaluate HEROMOTOCO’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether HEROMOTOCO has the ability to repay its debt with cash from its business, which is less of a concern for large companies. Last year, HEROMOTOCO’s operating cash flow exceeded its debt obligations,which indicates extremely low risk of HEROMOTOCO not being able to meet its debt near-team, given that it generates enough cash in a year to pay off its current debt.This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.
Next Steps:
Are you a shareholder? HEROMOTOCO’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Since HEROMOTOCO’s capital structure could change, I recommend assessing market expectations for HEROMOTOCO’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. So, I suggest you look at HEROMOTOCO’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.