Health Check: How Prudently Does IGas Energy (LON:IGAS) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies IGas Energy plc (LON:IGAS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for IGas Energy

What Is IGas Energy's Debt?

As you can see below, at the end of December 2020, IGas Energy had UK£13.7m of debt, up from UK£13.1m a year ago. Click the image for more detail. On the flip side, it has UK£2.44m in cash leading to net debt of about UK£11.3m.

How Strong Is IGas Energy's Balance Sheet?

We can see from the most recent balance sheet that IGas Energy had liabilities of UK£7.51m falling due within a year, and liabilities of UK£86.2m due beyond that. Offsetting these obligations, it had cash of UK£2.44m as well as receivables valued at UK£4.10m due within 12 months. So its liabilities total UK£87.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the UK£30.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, IGas Energy would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if IGas Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, IGas Energy made a loss at the EBIT level, and saw its revenue drop to UK£22m, which is a fall of 47%. To be frank that doesn't bode well.

Caveat Emptor

Not only did IGas Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable UK£42m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through UK£4.9m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for IGas Energy you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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