Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Ipca Laboratories Limited (NSE: IPCALAB) uses debt in its activity. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both cash and debt levels.
Consult our latest analysis for Ipca laboratories
What is the debt of Ipca Laboratories?
You can click on the graph below for historical figures, but it shows Ipca Labs had 2.65 billion yen in debt in March 2021, up from 5.01 billion yen a year earlier. But on the other hand, it also has 7.58 billion yen in cash, which leads to a net cash position of 4.92 billion yen.
How healthy is the balance sheet of Ipca laboratories?
We can see from the most recent balance sheet that Ipca Labs had liabilities of 11.3 billion yen maturing within one year and liabilities of 2.19 billion yen beyond. In compensation for these obligations, he had cash of 7.58 billion euros as well as receivables valued at 10.1 billion euros within 12 months. So it actually has ₹ 4.19b Following liquid assets as total liabilities.
Considering the size of Ipca Laboratories, it appears that its cash flow is well balanced with its total liabilities. So the 306.0b company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Simply put, the fact that Ipca Laboratories has more cash than debt is arguably a good indication that it can safely manage its debt.
While Ipca Laboratories does not appear to have gained much on the EBIT line, at least earnings remain stable for now. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether Ipca Laboratories can strengthen their balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Ipca Laboratories may have net cash on the balance sheet, but it is always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its profitability. ability to manage debt. Over the past three years, Ipca Laboratories has recorded free cash flow of 53% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
While we sympathize with investors who find debt to be of concern, you should keep in mind that Ipca Labs have net cash of 4.92 billion yen, as well as more liquid assets than liabilities. We are therefore not concerned with the use of debt by Ipca Laboratories. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Ipca laboratories you should know.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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