Is Indraprastha Gas (NSE:IGL) A Risky Investment?

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.' 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. As with many other companies Indraprastha Gas Limited (NSE:IGL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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

What Is Indraprastha Gas's Debt?

The chart below, which you can click on for greater detail, shows that Indraprastha Gas had ₹811.7m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds ₹30.4b in cash, so it actually has ₹29.5b net cash.

How Healthy Is Indraprastha Gas' Balance Sheet?

We can see from the most recent balance sheet that Indraprastha Gas had liabilities of ₹40.8b falling due within a year, and liabilities of ₹4.90b due beyond that. Offsetting these obligations, it had cash of ₹30.4b as well as receivables valued at ₹12.3b due within 12 months. So its liabilities total ₹3.02b more than the combination of its cash and short-term receivables.

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 ₹384.2b company is struggling for cash, we still think it's worth monitoring its 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.

Also good is that Indraprastha Gas grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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. Looking at the most recent three years, Indraprastha Gas recorded free cash flow of 35% 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 ₹29.5b. 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. For example - Indraprastha Gas has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.