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

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. Importantly, Balaxi Pharmaceuticals Limited (NSE:BALAXI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Balaxi Pharmaceuticals

What Is Balaxi Pharmaceuticals's Net Debt?

As you can see below, at the end of September 2024, Balaxi Pharmaceuticals had ₹303.3m of debt, up from ₹187.3m a year ago. Click the image for more detail. However, it does have ₹608.7m in cash offsetting this, leading to net cash of ₹305.4m.

How Strong Is Balaxi Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Balaxi Pharmaceuticals had liabilities of ₹693.2m falling due within a year, and liabilities of ₹27.7m due beyond that. On the other hand, it had cash of ₹608.7m and ₹845.7m worth of receivables due within a year. So it can boast ₹733.4m more liquid assets than total liabilities.

This surplus suggests that Balaxi Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Balaxi Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

While Balaxi Pharmaceuticals doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Balaxi Pharmaceuticals will need earnings to service that debt. 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. In the last three years, Balaxi Pharmaceuticals created free cash flow amounting to 2.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Balaxi Pharmaceuticals has net cash of ₹305.4m, as well as more liquid assets than liabilities. So we are not troubled with Balaxi Pharmaceuticals's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Balaxi Pharmaceuticals (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.