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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Indraprastha Gas

What Is Indraprastha Gas's Net Debt?

The image below, which you can click on for greater detail, shows that Indraprastha Gas had debt of ₹741.8m at the end of September 2024, a reduction from ₹843.6m over a year. However, its balance sheet shows it holds ₹31.8b in cash, so it actually has ₹31.1b net cash.

How Healthy Is Indraprastha Gas' Balance Sheet?

The latest balance sheet data shows that Indraprastha Gas had liabilities of ₹43.6b due within a year, and liabilities of ₹5.36b falling due after that. Offsetting these obligations, it had cash of ₹31.8b as well as receivables valued at ₹9.69b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.45b.

Of course, Indraprastha Gas has a market capitalization of ₹271.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

The modesty of its debt load may become crucial for Indraprastha Gas if management cannot prevent a repeat of the 21% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Indraprastha Gas 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Indraprastha Gas 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. In the last three years, Indraprastha Gas's free cash flow amounted to 38% of its EBIT, less 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 ₹31.1b. So we don't have any problem with Indraprastha Gas's use of debt. 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. We've identified 1 warning sign with Indraprastha Gas , and understanding them should be part of your investment process.

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.