Indraprastha Gas (NSE:IGL) Seems To Use Debt Quite Sensibly

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.' 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 note that Indraprastha Gas Limited (NSE:IGL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Indraprastha Gas Carry?

The image below, which you can click on for greater detail, shows that at September 2025 Indraprastha Gas had debt of ₹229.0m, up from none in one year. But it also has ₹44.4b in cash to offset that, meaning it has ₹44.2b net cash.

How Strong Is Indraprastha Gas' Balance Sheet?

The latest balance sheet data shows that Indraprastha Gas had liabilities of ₹48.7b due within a year, and liabilities of ₹6.45b falling due after that. On the other hand, it had cash of ₹44.4b and ₹8.54b worth of receivables due within a year. So it has liabilities totalling ₹2.20b 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 while it's hard to imagine that the ₹301.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Indraprastha Gas boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Indraprastha Gas

It is just as well that Indraprastha Gas's load is not too heavy, because its EBIT was down 23% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Indraprastha Gas's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 ₹44.2b. So we don't have any problem with Indraprastha Gas's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Indraprastha Gas has 1 warning sign we think you should be aware of.

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.