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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Petronet LNG Limited (NSE:PETRONET) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Petronet LNG
What Is Petronet LNG's Net Debt?
As you can see below, Petronet LNG had ₹34.7b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹73.8b in cash offsetting this, leading to net cash of ₹39.1b.
How Healthy Is Petronet LNG's Balance Sheet?
According to the last reported balance sheet, Petronet LNG had liabilities of ₹41.0b due within 12 months, and liabilities of ₹48.9b due beyond 12 months. On the other hand, it had cash of ₹73.8b and ₹32.2b worth of receivables due within a year. So it can boast ₹16.2b more liquid assets than total liabilities.
This surplus suggests that Petronet LNG has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Petronet LNG boasts net cash, so it's fair to say it does not have a heavy debt load!
Petronet LNG's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Petronet LNG's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Petronet LNG has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Petronet LNG produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Petronet LNG has net cash of ₹39.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹21b, being 69% of its EBIT. So is Petronet LNG's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Petronet LNG , and understanding them should be part of your investment process.
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.
About NSEI:PETRONET
Petronet LNG
Engages in the import, storage, regasification, and supply of liquefied natural gas (LNG) in India.
Solid track record with excellent balance sheet and pays a dividend.