Balaxi Pharmaceuticals (NSE:BALAXI) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Balaxi Pharmaceuticals Limited (NSE:BALAXI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Balaxi Pharmaceuticals

What Is Balaxi Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Balaxi Pharmaceuticals had debt of ₹187.3m, up from ₹22.7m in one year. But it also has ₹281.4m in cash to offset that, meaning it has ₹94.1m net cash.

How Strong Is Balaxi Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Balaxi Pharmaceuticals had liabilities of ₹557.9m falling due within a year, and liabilities of ₹32.1m due beyond that. Offsetting these obligations, it had cash of ₹281.4m as well as receivables valued at ₹470.0m due within 12 months. So it can boast ₹161.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Balaxi Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Balaxi Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Balaxi Pharmaceuticals has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Balaxi Pharmaceuticals'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Balaxi Pharmaceuticals 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. Over the last three years, Balaxi Pharmaceuticals reported free cash flow worth 6.4% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Balaxi Pharmaceuticals has net cash of ₹94.1m, as well as more liquid assets than liabilities. So we are not troubled with Balaxi Pharmaceuticals's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Balaxi Pharmaceuticals you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.