Is Dr. Lal PathLabs (NSE:LALPATHLAB) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Dr. Lal PathLabs Limited (NSE:LALPATHLAB) does use debt in its business. But should shareholders be worried about its use of debt?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Debt?

As you can see below, at the end of September 2022, Dr. Lal PathLabs had ₹2.37b of debt, up from ₹1.00m a year ago. Click the image for more detail. But it also has ₹6.50b in cash to offset that, meaning it has ₹4.13b net cash.

A Look At Dr. Lal PathLabs' Liabilities

Zooming in on the latest balance sheet data, we can see that Dr. Lal PathLabs had liabilities of ₹4.50b due within 12 months and liabilities of ₹2.69b due beyond that. Offsetting these obligations, it had cash of ₹6.50b as well as receivables valued at ₹929.0m due within 12 months. So it can boast ₹236.0m more liquid assets than total liabilities.

This state of affairs indicates that Dr. Lal PathLabs' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹189.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Dr. Lal PathLabs boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Dr. Lal PathLabs if management cannot prevent a repeat of the 32% 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. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. Dr. Lal PathLabs may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Dr. Lal PathLabs recorded free cash flow worth 55% 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 ₹4.13b in net cash and a decent-looking balance sheet. So we don't have any problem with Dr. Lal PathLabs's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Dr. Lal PathLabs (1 is potentially serious!) that you should be aware of before investing here.

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.