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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dr. Lal PathLabs

What Is Dr. Lal PathLabs's Net Debt?

As you can see below, Dr. Lal PathLabs had ₹2.99b of debt at September 2023, down from ₹4.27b a year prior. However, it does have ₹8.97b in cash offsetting this, leading to net cash of ₹5.98b.

How Healthy Is Dr. Lal PathLabs' Balance Sheet?

We can see from the most recent balance sheet that Dr. Lal PathLabs had liabilities of ₹4.71b falling due within a year, and liabilities of ₹1.69b due beyond that. On the other hand, it had cash of ₹8.97b and ₹867.0m worth of receivables due within a year. So it actually has ₹3.44b 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 ₹185.8b 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.

Another good sign is that Dr. Lal PathLabs has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 68% 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

While we empathize with investors who find debt concerning, you should keep in mind that Dr. Lal PathLabs has net cash of ₹5.98b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Dr. Lal PathLabs's use of debt is risky. 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 instance, we've identified 2 warning signs for Dr. Lal PathLabs that you should be aware of.

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.