We Think NGL Fine-Chem (NSE:NGLFINE) Is Taking Some Risk With Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 NGL Fine-Chem Limited (NSE:NGLFINE) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is NGL Fine-Chem's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 NGL Fine-Chem had debt of ₹731.5m, up from ₹340.0m in one year. However, it also had ₹655.3m in cash, and so its net debt is ₹76.3m.

How Strong Is NGL Fine-Chem's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NGL Fine-Chem had liabilities of ₹1.19b due within 12 months and liabilities of ₹319.9m due beyond that. Offsetting this, it had ₹655.3m in cash and ₹815.5m in receivables that were due within 12 months. So it has liabilities totalling ₹38.8m more than its cash and near-term receivables, combined.

Having regard to NGL Fine-Chem's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹7.61b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, NGL Fine-Chem has virtually no net debt, so it's fair to say it does not have a heavy debt load!

See our latest analysis for NGL Fine-Chem

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

NGL Fine-Chem has net debt of just 0.23 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 9.2 times, which is more than adequate. The modesty of its debt load may become crucial for NGL Fine-Chem if management cannot prevent a repeat of the 49% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is NGL Fine-Chem's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, NGL Fine-Chem 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.

Our View

While NGL Fine-Chem's conversion of EBIT to free cash flow makes us cautious about it, its track record of (not) growing its EBIT is no better. But on the brighter side of life, its net debt to EBITDA leaves us feeling more frolicsome. Taking the abovementioned factors together we do think NGL Fine-Chem's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. 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 4 warning signs for NGL Fine-Chem (of which 2 make us uncomfortable!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.