InterGlobe Aviation (NSE:INDIGO) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, InterGlobe Aviation Limited (NSE:INDIGO) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for InterGlobe Aviation

What Is InterGlobe Aviation's Net Debt?

As you can see below, InterGlobe Aviation had ₹18.0b of debt at September 2024, down from ₹22.6b a year prior. However, its balance sheet shows it holds ₹360.4b in cash, so it actually has ₹342.4b net cash.

A Look At InterGlobe Aviation's Liabilities

The latest balance sheet data shows that InterGlobe Aviation had liabilities of ₹352.7b due within a year, and liabilities of ₹581.5b falling due after that. On the other hand, it had cash of ₹360.4b and ₹7.15b worth of receivables due within a year. So it has liabilities totalling ₹566.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since InterGlobe Aviation has a huge market capitalization of ₹1.55t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, InterGlobe Aviation boasts net cash, so it's fair to say it does not have a heavy debt load!

If InterGlobe Aviation can keep growing EBIT at last year's rate of 10% over the last year, then it will find its debt load easier to manage. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine InterGlobe Aviation's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. InterGlobe Aviation 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, InterGlobe Aviation actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While InterGlobe Aviation does have more liabilities than liquid assets, it also has net cash of ₹342.4b. The cherry on top was that in converted 232% of that EBIT to free cash flow, bringing in ₹170b. So we don't have any problem with InterGlobe Aviation's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in InterGlobe Aviation, you may well want to click here to check an interactive graph of its earnings per share history.

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.