Is IFGL Refractories (NSE:IFGLEXPOR) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, IFGL Refractories Limited (NSE:IFGLEXPOR) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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?

The image below, which you can click on for greater detail, shows that IFGL Refractories had debt of ₹422.1m at the end of September 2020, a reduction from ₹817.0m over a year. But it also has ₹2.42b in cash to offset that, meaning it has ₹2.00b net cash.

How Healthy Is IFGL Refractories' Balance Sheet?

The latest balance sheet data shows that IFGL Refractories had liabilities of ₹1.83b due within a year, and liabilities of ₹386.1m falling due after that. Offsetting these obligations, it had cash of ₹2.42b as well as receivables valued at ₹2.03b due within 12 months. So it can boast ₹2.24b 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. Simply put, the fact that IFGL Refractories has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that IFGL Refractories grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While IFGL Refractories 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, IFGL Refractories recorded free cash flow worth a fulsome 96% 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 IFGL Refractories has net cash of ₹2.00b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹1.1b, being 96% of its EBIT. So we don't think IFGL Refractories's use of debt is risky. 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. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for IFGL Refractories (of which 1 shouldn't be ignored!) 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. 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.
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