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

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.' 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. As with many other companies Indraprastha Gas Limited (NSE:IGL) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Indraprastha Gas

What Is Indraprastha Gas's Debt?

As you can see below, Indraprastha Gas had ₹843.6m of debt at September 2023, down from ₹986.2m a year prior. But it also has ₹27.9b in cash to offset that, meaning it has ₹27.0b net cash.

How Strong Is Indraprastha Gas' Balance Sheet?

We can see from the most recent balance sheet that Indraprastha Gas had liabilities of ₹39.4b falling due within a year, and liabilities of ₹4.51b due beyond that. Offsetting this, it had ₹27.9b in cash and ₹9.66b in receivables that were due within 12 months. So it has liabilities totalling ₹6.39b more than its cash and near-term receivables, combined.

Of course, Indraprastha Gas has a market capitalization of ₹308.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Also good is that Indraprastha Gas grew its EBIT at 11% over the last year, further increasing its ability to manage debt. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Indraprastha Gas's liabilities, but we can be reassured by the fact it has has net cash of ₹27.0b. And it also grew its EBIT by 11% 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.

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.