Petronet LNG (NSE:PETRONET) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We can see that Petronet LNG Limited (NSE:PETRONET) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Petronet LNG

What Is Petronet LNG's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Petronet LNG had ₹28.1b of debt in September 2024, down from ₹31.9b, one year before. However, its balance sheet shows it holds ₹102.1b in cash, so it actually has ₹74.0b net cash.

How Healthy Is Petronet LNG's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Petronet LNG had liabilities of ₹36.7b due within 12 months and liabilities of ₹35.6b due beyond that. Offsetting this, it had ₹102.1b in cash and ₹32.0b in receivables that were due within 12 months. So it actually has ₹61.8b 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. Simply put, the fact that Petronet LNG has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Petronet LNG saw its EBIT drop by 3.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Petronet LNG 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. During the last three years, Petronet LNG produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Petronet LNG has net cash of ₹74.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹38b, being 68% of its EBIT. So we don't think Petronet LNG's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.