Here's Why Ircon International (NSE:IRCON) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Ircon International Limited (NSE:IRCON) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ircon International

What Is Ircon International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Ircon International had ₹15.0b of debt, an increase on ₹14.0b, over one year. But it also has ₹52.2b in cash to offset that, meaning it has ₹37.2b net cash.

How Healthy Is Ircon International's Balance Sheet?

According to the last reported balance sheet, Ircon International had liabilities of ₹72.7b due within 12 months, and liabilities of ₹30.5b due beyond 12 months. On the other hand, it had cash of ₹52.2b and ₹10.3b worth of receivables due within a year. So it has liabilities totalling ₹40.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Ircon International is worth ₹81.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Ircon International also has more cash than debt, so we're pretty confident it can manage its debt safely.

If Ircon International can keep growing EBIT at last year's rate of 16% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But it is Ircon International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ircon International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Ircon International actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Ircon International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹37.2b. And it impressed us with free cash flow of -₹2.7b, being 105% of its EBIT. So we don't have any problem with Ircon International's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Ircon International (1 is a bit unpleasant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.