IFGL Refractories (NSE:IFGLEXPOR) Has A Somewhat Strained Balance Sheet

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. Importantly, IFGL Refractories Limited (NSE:IFGLEXPOR) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for IFGL Refractories

What Is IFGL Refractories's Debt?

As you can see below, at the end of March 2023, IFGL Refractories had ₹1.49b of debt, up from ₹870.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.71b in cash, so it actually has ₹224.5m net cash.

A Look At IFGL Refractories' Liabilities

We can see from the most recent balance sheet that IFGL Refractories had liabilities of ₹3.09b falling due within a year, and liabilities of ₹1.12b due beyond that. On the other hand, it had cash of ₹1.71b and ₹3.50b worth of receivables due within a year. So it can boast ₹999.0m more liquid assets than total liabilities.

This surplus suggests that IFGL Refractories has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that IFGL Refractories has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, IFGL Refractories's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is IFGL Refractories'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, IFGL Refractories burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that IFGL Refractories has net cash of ₹224.5m, as well as more liquid assets than liabilities. So while IFGL Refractories does not have a great balance sheet, it's certainly not too bad. 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. For example, we've discovered 2 warning signs for IFGL Refractories (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.