These 4 Measures Indicate That Indraprastha Gas (NSE:IGL) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. We note that Indraprastha Gas Limited (NSE:IGL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Indraprastha Gas

How Much Debt Does Indraprastha Gas Carry?

The image below, which you can click on for greater detail, shows that Indraprastha Gas had debt of ₹827.7m at the end of March 2023, a reduction from ₹1.08b over a year. However, it does have ₹30.5b in cash offsetting this, leading to net cash of ₹29.7b.

A Look At Indraprastha Gas' Liabilities

Zooming in on the latest balance sheet data, we can see that Indraprastha Gas had liabilities of ₹42.3b due within 12 months and liabilities of ₹4.58b due beyond that. On the other hand, it had cash of ₹30.5b and ₹9.03b worth of receivables due within a year. So its liabilities total ₹7.34b more than the combination of its cash and short-term receivables.

Of course, Indraprastha Gas has a market capitalization of ₹331.6b, 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. Despite its noteworthy liabilities, Indraprastha Gas boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Indraprastha Gas saw its EBIT drop by 5.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Indraprastha Gas has ₹29.7b in net cash. So we are not troubled with Indraprastha Gas's debt use. 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.

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.