These 4 Measures Indicate That Dr. Lal PathLabs (NSE:LALPATHLAB) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Dr. Lal PathLabs Limited (NSE:LALPATHLAB) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dr. Lal PathLabs

What Is Dr. Lal PathLabs's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Dr. Lal PathLabs had debt of ₹5.33b, up from ₹1.50b in one year. However, its balance sheet shows it holds ₹6.82b in cash, so it actually has ₹1.49b net cash.

How Healthy Is Dr. Lal PathLabs' Balance Sheet?

The latest balance sheet data shows that Dr. Lal PathLabs had liabilities of ₹5.00b due within a year, and liabilities of ₹3.10b falling due after that. Offsetting these obligations, it had cash of ₹6.82b as well as receivables valued at ₹1.06b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹216.4m.

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 ₹212.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Dr. Lal PathLabs also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Dr. Lal PathLabs's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dr. Lal PathLabs can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Dr. Lal PathLabs produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Dr. Lal PathLabs's liabilities, but we can be reassured by the fact it has has net cash of ₹1.49b. So we don't have any problem with Dr. Lal PathLabs'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. To that end, you should be aware of the 3 warning signs we've spotted with Dr. Lal PathLabs .

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.