These 4 Measures Indicate That I G Petrochemicals (NSE:IGPL) Is Using Debt Reasonably Well

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. We note that I G Petrochemicals Limited (NSE:IGPL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 I G Petrochemicals

What Is I G Petrochemicals's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 I G Petrochemicals had debt of ₹1.72b, up from ₹1.64b in one year. But it also has ₹2.00b in cash to offset that, meaning it has ₹277.9m net cash.

How Strong Is I G Petrochemicals' Balance Sheet?

The latest balance sheet data shows that I G Petrochemicals had liabilities of ₹3.92b due within a year, and liabilities of ₹1.97b falling due after that. Offsetting these obligations, it had cash of ₹2.00b as well as receivables valued at ₹3.47b due within 12 months. So it has liabilities totalling ₹415.9m more than its cash and near-term receivables, combined.

Given I G Petrochemicals has a market capitalization of ₹18.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, I G Petrochemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that I G Petrochemicals has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is I G Petrochemicals'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. I G Petrochemicals 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. In the last three years, I G Petrochemicals created free cash flow amounting to 13% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

We could understand if investors are concerned about I G Petrochemicals's liabilities, but we can be reassured by the fact it has has net cash of ₹277.9m. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think I G Petrochemicals'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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for I G Petrochemicals (of which 1 is a bit unpleasant!) you should know about.

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.