Is Zydus Wellness (NSE:ZYDUSWELL) A Risky Investment?

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. We can see that Zydus Wellness Limited (NSE:ZYDUSWELL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zydus Wellness

What Is Zydus Wellness's Net Debt?

The image below, which you can click on for greater detail, shows that Zydus Wellness had debt of ₹11.6b at the end of September 2020, a reduction from ₹15.1b over a year. But on the other hand it also has ₹12.2b in cash, leading to a ₹611.5m net cash position.

How Strong Is Zydus Wellness' Balance Sheet?

According to the last reported balance sheet, Zydus Wellness had liabilities of ₹20.2b due within 12 months, and liabilities of ₹301.0m due beyond 12 months. Offsetting this, it had ₹12.2b in cash and ₹929.6m in receivables that were due within 12 months. So its liabilities total ₹7.42b more than the combination of its cash and short-term receivables.

Given Zydus Wellness has a market capitalization of ₹120.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Zydus Wellness boasts net cash, so it's fair to say it does not have a heavy debt load!

Also relevant is that Zydus Wellness has grown its EBIT by a very respectable 23% in the last year, thus enhancing its ability to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zydus Wellness 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. Zydus Wellness 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. During the last three years, Zydus Wellness generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Zydus Wellness's liabilities, but we can be reassured by the fact it has has net cash of ₹611.5m. And it impressed us with free cash flow of ₹2.1b, being 94% of its EBIT. So is Zydus Wellness'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. To that end, you should be aware of the 3 warning signs we've spotted with Zydus Wellness .

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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This article by Simply Wall St is general in nature. 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.
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