These 4 Measures Indicate That Zydus Wellness (NSE:ZYDUSWELL) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zydus Wellness

What Is Zydus Wellness's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zydus Wellness had ₹1.54b of debt in September 2024, down from ₹3.52b, one year before. However, its balance sheet shows it holds ₹3.88b in cash, so it actually has ₹2.34b net cash.

A Look At Zydus Wellness' Liabilities

The latest balance sheet data shows that Zydus Wellness had liabilities of ₹4.91b due within a year, and liabilities of ₹222.0m falling due after that. Offsetting these obligations, it had cash of ₹3.88b as well as receivables valued at ₹2.37b due within 12 months. So it can boast ₹1.11b more liquid assets than total liabilities.

Having regard to Zydus Wellness' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹97.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Zydus Wellness has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Zydus Wellness has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Zydus Wellness'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. While Zydus Wellness has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Zydus Wellness produced sturdy free cash flow equating to 68% 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zydus Wellness has net cash of ₹2.34b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 24% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Zydus Wellness that you should be aware of.

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. 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.