We Think Mahanagar Gas (NSE:MGL) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Mahanagar Gas Limited (NSE:MGL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mahanagar Gas

What Is Mahanagar Gas's Net Debt?

As you can see below, Mahanagar Gas had ₹1.15b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹21.4b in cash, so it actually has ₹20.2b net cash.

How Strong Is Mahanagar Gas' Balance Sheet?

We can see from the most recent balance sheet that Mahanagar Gas had liabilities of ₹16.2b falling due within a year, and liabilities of ₹3.60b due beyond that. On the other hand, it had cash of ₹21.4b and ₹2.69b worth of receivables due within a year. So it can boast ₹4.28b more liquid assets than total liabilities.

This short term liquidity is a sign that Mahanagar Gas could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mahanagar Gas has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Mahanagar Gas has boosted its EBIT by 99%, thus reducing the spectre of future debt repayments. 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 Mahanagar 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mahanagar Gas has net cash of ₹20.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 99% over the last year. So we don't think Mahanagar Gas's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Mahanagar Gas has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.