IFGL Refractories (NSE:IFGLEXPOR) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies IFGL Refractories Limited (NSE:IFGLEXPOR) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for IFGL Refractories

How Much Debt Does IFGL Refractories Carry?

You can click the graphic below for the historical numbers, but it shows that IFGL Refractories had ₹483.2m of debt in March 2021, down from ₹517.9m, one year before. But on the other hand it also has ₹3.15b in cash, leading to a ₹2.67b net cash position.

How Strong Is IFGL Refractories' Balance Sheet?

We can see from the most recent balance sheet that IFGL Refractories had liabilities of ₹2.26b falling due within a year, and liabilities of ₹676.6m due beyond that. Offsetting these obligations, it had cash of ₹3.15b as well as receivables valued at ₹2.28b due within 12 months. So it can boast ₹2.50b more liquid assets than total liabilities.

This excess liquidity suggests that IFGL Refractories is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, IFGL Refractories boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, IFGL Refractories grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since IFGL Refractories will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. IFGL Refractories 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. Over the last three years, IFGL Refractories actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case IFGL Refractories has ₹2.67b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in ₹1.1b. The bottom line is that we do not find IFGL Refractories's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - IFGL Refractories has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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