These 4 Measures Indicate That Balaxi Pharmaceuticals (NSE:BALAXI) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Balaxi Pharmaceuticals Limited (NSE:BALAXI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Balaxi Pharmaceuticals had debt of ₹176.6m, up from ₹116.2m in one year. However, it does have ₹622.9m in cash offsetting this, leading to net cash of ₹446.3m.

How Strong Is Balaxi Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Balaxi Pharmaceuticals had liabilities of ₹542.0m due within 12 months and liabilities of ₹27.8m due beyond that. Offsetting this, it had ₹622.9m in cash and ₹576.1m in receivables that were due within 12 months. So it actually has ₹629.2m 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. Simply put, the fact that Balaxi Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Balaxi Pharmaceuticals has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Balaxi Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Balaxi Pharmaceuticals has ₹446.3m 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Balaxi Pharmaceuticals you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com