We Think Petronet LNG (NSE:PETRONET) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 Petronet LNG Limited (NSE:PETRONET) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Petronet LNG

How Much Debt Does Petronet LNG Carry?

The image below, which you can click on for greater detail, shows that Petronet LNG had debt of ₹34.4b at the end of March 2022, a reduction from ₹37.4b over a year. However, its balance sheet shows it holds ₹52.0b in cash, so it actually has ₹17.6b net cash.

How Healthy Is Petronet LNG's Balance Sheet?

According to the last reported balance sheet, Petronet LNG had liabilities of ₹27.4b due within 12 months, and liabilities of ₹49.6b due beyond 12 months. On the other hand, it had cash of ₹52.0b and ₹27.8b worth of receivables due within a year. So it can boast ₹2.92b more liquid assets than total liabilities.

This state of affairs indicates that Petronet LNG's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹315.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Petronet LNG has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Petronet LNG grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Petronet LNG recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Petronet LNG has net cash of ₹17.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹34b, being 81% of its EBIT. So is Petronet LNG's debt a risk? It doesn't seem so to us. 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. Be aware that Petronet LNG is showing 2 warning signs in our investment analysis , you should know about...

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.