Is Mahanagar Gas (NSE:MGL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Mahanagar Gas Limited (NSE:MGL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mahanagar Gas

What Is Mahanagar Gas's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Mahanagar Gas had debt of ₹1.41b, up from ₹1.15b in one year. But it also has ₹14.4b in cash to offset that, meaning it has ₹13.0b net cash.

How Strong Is Mahanagar Gas' Balance Sheet?

According to the last reported balance sheet, Mahanagar Gas had liabilities of ₹17.0b due within 12 months, and liabilities of ₹5.46b due beyond 12 months. Offsetting these obligations, it had cash of ₹14.4b as well as receivables valued at ₹3.83b due within 12 months. So its liabilities total ₹4.18b more than the combination of its cash and short-term receivables.

Since publicly traded Mahanagar Gas shares are worth a total of ₹192.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mahanagar Gas also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Mahanagar Gas has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mahanagar Gas can strengthen its balance sheet over time. 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. Mahanagar 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, Mahanagar Gas recorded free cash flow of 42% 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 Mahanagar Gas's liabilities, but we can be reassured by the fact it has has net cash of ₹13.0b. And it impressed us with its EBIT growth of 23% over the last year. So is Mahanagar 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Mahanagar Gas , and understanding them should be part of your investment process.

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.