Is Unichem Laboratories (NSE:UNICHEMLAB) Using Too Much Debt?

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 Unichem Laboratories Limited (NSE:UNICHEMLAB) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Unichem Laboratories

How Much Debt Does Unichem Laboratories Carry?

As you can see below, Unichem Laboratories had ₹1.84b of debt at March 2020, down from ₹2.00b a year prior. But it also has ₹6.45b in cash to offset that, meaning it has ₹4.61b net cash.

A Look At Unichem Laboratories's Liabilities

The latest balance sheet data shows that Unichem Laboratories had liabilities of ₹5.67b due within a year, and liabilities of ₹466.6m falling due after that. On the other hand, it had cash of ₹6.45b and ₹4.36b worth of receivables due within a year. So it can boast ₹4.68b more liquid assets than total liabilities.

This excess liquidity suggests that Unichem Laboratories is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Unichem Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Unichem Laboratories's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Unichem Laboratories's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Unichem Laboratories?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Unichem Laboratories lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₹3.7b and booked a ₹515.6m accounting loss. But at least it has ₹4.61b on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Unichem Laboratories (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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