Here's Why Dr. Lal PathLabs (NSE:LALPATHLAB) Can Manage Its Debt Responsibly

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 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 Dr. Lal PathLabs Limited (NSE:LALPATHLAB) makes use of debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Dr. Lal PathLabs

What Is Dr. Lal PathLabs's Net Debt?

As you can see below, Dr. Lal PathLabs had ₹2.37b of debt at March 2023, down from ₹3.46b a year prior. But on the other hand it also has ₹8.15b in cash, leading to a ₹5.79b net cash position.

How Healthy Is Dr. Lal PathLabs' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dr. Lal PathLabs had liabilities of ₹4.70b due within 12 months and liabilities of ₹2.16b due beyond that. Offsetting these obligations, it had cash of ₹8.15b as well as receivables valued at ₹722.0m due within 12 months. So it can boast ₹2.02b more liquid assets than total liabilities.

Having regard to Dr. Lal PathLabs' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹193.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Dr. Lal PathLabs has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Dr. Lal PathLabs if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Dr. Lal PathLabs'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 Dr. Lal PathLabs 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 most recent three years, Dr. Lal PathLabs recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dr. Lal PathLabs has ₹5.79b in net cash and a decent-looking balance sheet. So we don't have any problem with Dr. Lal PathLabs's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Dr. Lal PathLabs , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.