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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Indraprastha Gas Limited (NSE:IGL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Indraprastha Gas

How Much Debt Does Indraprastha Gas Carry?

The chart below, which you can click on for greater detail, shows that Indraprastha Gas had ₹986.2m in debt in September 2022; about the same as the year before. However, it does have ₹36.0b in cash offsetting this, leading to net cash of ₹35.0b.

How Healthy Is Indraprastha Gas' Balance Sheet?

The latest balance sheet data shows that Indraprastha Gas had liabilities of ₹38.3b due within a year, and liabilities of ₹4.22b falling due after that. On the other hand, it had cash of ₹36.0b and ₹7.76b worth of receivables due within a year. So it actually has ₹1.26b more liquid assets than total liabilities.

Having regard to Indraprastha Gas' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹296.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Indraprastha Gas boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Indraprastha Gas grew its EBIT by 12% last year, making its debt load easier to handle. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Indraprastha Gas has net cash of ₹35.0b, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So is Indraprastha Gas's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Indraprastha Gas 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.

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

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.