Is Zydus Wellness (NSE:ZYDUSWELL) 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.' 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. As with many other companies Zydus Wellness Limited (NSE:ZYDUSWELL) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Zydus Wellness's Debt?

As you can see below, Zydus Wellness had ₹1.88b of debt at March 2025, down from ₹3.29b a year prior. On the flip side, it has ₹1.09b in cash leading to net debt of about ₹791.0m.

How Strong Is Zydus Wellness' Balance Sheet?

We can see from the most recent balance sheet that Zydus Wellness had liabilities of ₹7.46b falling due within a year, and liabilities of ₹248.0m due beyond that. On the other hand, it had cash of ₹1.09b and ₹3.88b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.73b.

Having regard to Zydus Wellness' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹153.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Zydus Wellness has virtually no net debt, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Zydus Wellness

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Zydus Wellness has a low net debt to EBITDA ratio of only 0.21. And its EBIT covers its interest expense a whopping 46.7 times over. So we're pretty relaxed about its super-conservative use of debt. Fortunately, Zydus Wellness grew its EBIT by 6.6% in the last year, making that debt load look even more manageable. 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 Zydus Wellness can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Zydus Wellness produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Zydus Wellness's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Looking at the bigger picture, we think Zydus Wellness's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in Zydus Wellness, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.