When evaluating the risk of a company, some argue that volatility is a better indicator than debt. However, Warren Buffett notes that volatility is not synonymous with risk. Instead, debt can be a significant factor in determining a company’s risk level, as excessive debt can lead to financial difficulties. In the case of Hindustan Unilever Limited (NSE:HINDUNILVR), the company does have debt on its balance sheet, but the question is whether this debt poses a significant risk.
As of March 2025, Hindustan Unilever had ₹16.5b of debt, an increase from ₹14.8b the previous year. However, the company also holds ₹110.5b in cash, resulting in a net cash position of ₹94.1b. This suggests that the company’s debt is not a significant concern. The company’s balance sheet shows liabilities of ₹165.4b due within a year and ₹137.3b due beyond that, offset by cash and receivables valued at ₹46.8b. While the company’s liabilities outweigh its cash and near-term receivables by ₹145.4b, its net cash position and significant market capitalization of ₹6.18t suggest that this level of liabilities is not a major threat.
Hindustan Unilever’s ability to generate free cash flow is also a positive indicator, with the company recording free cash flow worth 85% of its EBIT over the last three years. This positions the company well to manage its debt and pay down liabilities if necessary. Overall, while it is essential to consider a company’s total liabilities, Hindustan Unilever’s net cash position and strong free cash flow suggest that its use of debt is not risky.
It is also important to consider other factors beyond the balance sheet, such as the company’s earnings stability and growth prospects. While Hindustan Unilever’s earnings have remained stable, its ability to generate free cash flow and maintain a healthy balance sheet will be crucial in determining its long-term success. Investors should continue to monitor the company’s balance sheet and earnings performance to ensure that its debt levels remain manageable. Ultimately, Hindustan Unilever’s net cash position and strong free cash flow suggest that its use of debt is not a significant concern, and the company’s overall financial health appears to be stable.