Is InterGlobe Aviation (NSE:INDIGO) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that InterGlobe Aviation Limited (NSE:INDIGO) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for InterGlobe Aviation

What Is InterGlobe Aviation's Net Debt?

You can click the graphic below for the historical numbers, but it shows that InterGlobe Aviation had ₹18.9b of debt in March 2024, down from ₹22.5b, one year before. However, its balance sheet shows it holds ₹322.9b in cash, so it actually has ₹304.0b net cash.

How Strong Is InterGlobe Aviation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InterGlobe Aviation had liabilities of ₹308.0b due within 12 months and liabilities of ₹494.3b due beyond that. On the other hand, it had cash of ₹322.9b and ₹6.43b worth of receivables due within a year. So it has liabilities totalling ₹472.9b more than its cash and near-term receivables, combined.

InterGlobe Aviation has a very large market capitalization of ₹1.63t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, InterGlobe Aviation boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, InterGlobe Aviation is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 143% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if InterGlobe Aviation can strengthen its balance sheet over time. 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. While InterGlobe Aviation 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 two years, InterGlobe Aviation actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While InterGlobe Aviation does have more liabilities than liquid assets, it also has net cash of ₹304.0b. The cherry on top was that in converted 209% of that EBIT to free cash flow, bringing in ₹192b. So we don't think InterGlobe Aviation's use of debt is risky. 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. For example, we've discovered 1 warning sign for InterGlobe Aviation that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com