Is Balaxi Pharmaceuticals (NSE:BALAXI) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Balaxi Pharmaceuticals Limited (NSE:BALAXI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Balaxi Pharmaceuticals

How Much Debt Does Balaxi Pharmaceuticals Carry?

As you can see below, at the end of March 2023, Balaxi Pharmaceuticals had ₹133.1m of debt, up from ₹36.4m a year ago. Click the image for more detail. However, it does have ₹282.2m in cash offsetting this, leading to net cash of ₹149.1m.

A Look At Balaxi Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Balaxi Pharmaceuticals had liabilities of ₹531.3m falling due within a year, and liabilities of ₹36.6m due beyond that. On the other hand, it had cash of ₹282.2m and ₹550.7m worth of receivables due within a year. So it can boast ₹265.0m 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 other side of the story is that Balaxi Pharmaceuticals saw its EBIT decline by 4.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 15% 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 it is always sensible to investigate a company's debt, in this case Balaxi Pharmaceuticals has ₹149.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Balaxi Pharmaceuticals's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Balaxi Pharmaceuticals 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.