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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

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. 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. 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 IFGL Refractories

What Is IFGL Refractories's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 IFGL Refractories had ₹1.63b of debt, an increase on ₹1.48b, over one year. However, it does have ₹1.87b in cash offsetting this, leading to net cash of ₹237.9m.

How Healthy Is IFGL Refractories' Balance Sheet?

The latest balance sheet data shows that IFGL Refractories had liabilities of ₹3.13b due within a year, and liabilities of ₹1.05b falling due after that. On the other hand, it had cash of ₹1.87b and ₹3.25b worth of receivables due within a year. So it actually has ₹935.7m more liquid assets than total liabilities.

This short term liquidity is a sign that IFGL Refractories could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that IFGL Refractories has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that IFGL Refractories's load is not too heavy, because its EBIT was down 28% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if IFGL Refractories can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, IFGL Refractories saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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 ₹237.9m, 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. 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, we've discovered 1 warning sign for IFGL Refractories that you should be aware of before investing here.

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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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.