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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dr. Lal PathLabs

How Much Debt Does Dr. Lal PathLabs Carry?

As you can see below, Dr. Lal PathLabs had ₹833.3m of debt at March 2024, down from ₹2.37b a year prior. However, it does have ₹9.43b in cash offsetting this, leading to net cash of ₹8.59b.

How Healthy Is Dr. Lal PathLabs' Balance Sheet?

The latest balance sheet data shows that Dr. Lal PathLabs had liabilities of ₹4.65b due within a year, and liabilities of ₹1.05b falling due after that. Offsetting these obligations, it had cash of ₹9.43b as well as receivables valued at ₹1.10b due within 12 months. So it actually has ₹4.82b 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 it's very unlikely that the ₹256.2b company is short on cash, but still worth keeping an eye on the 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.

On top of that, Dr. Lal PathLabs grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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. 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 68% 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 ₹8.59b in net cash and a decent-looking balance sheet. And we liked the look of last year's 38% year-on-year EBIT growth. So is Dr. Lal PathLabs's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Dr. Lal PathLabs .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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