Does Indraprastha Gas (NSE:IGL) Have A Healthy Balance Sheet?

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. Importantly, Indraprastha Gas Limited (NSE:IGL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Indraprastha Gas

What Is Indraprastha Gas's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Indraprastha Gas had ₹966.5m of debt, an increase on ₹854.0m, over one year. But on the other hand it also has ₹29.0b in cash, leading to a ₹28.0b net cash position.

How Healthy Is Indraprastha Gas' Balance Sheet?

The latest balance sheet data shows that Indraprastha Gas had liabilities of ₹29.7b due within a year, and liabilities of ₹3.67b falling due after that. Offsetting these obligations, it had cash of ₹29.0b as well as receivables valued at ₹3.40b due within 12 months. So it has liabilities totalling ₹1.01b more than its cash and near-term receivables, combined.

Having regard to Indraprastha Gas' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹257.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Indraprastha Gas also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Indraprastha Gas grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Indraprastha Gas's ability to maintain a healthy balance sheet going forward. 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. While Indraprastha Gas 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. Looking at the most recent three years, Indraprastha Gas recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Indraprastha Gas has ₹28.0b in net cash. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Indraprastha Gas's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Indraprastha Gas that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.