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.' 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. We note that Dr. Lal PathLabs Limited (NSE:LALPATHLAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that Dr. Lal PathLabs had debt of ₹417.0m at the end of September 2024, a reduction from ₹1.25b over a year. But it also has ₹11.3b in cash to offset that, meaning it has ₹10.9b net cash.

How Strong Is Dr. Lal PathLabs' Balance Sheet?

According to the last reported balance sheet, Dr. Lal PathLabs had liabilities of ₹4.62b due within 12 months, and liabilities of ₹999.0m due beyond 12 months. On the other hand, it had cash of ₹11.3b and ₹911.0m worth of receivables due within a year. So it actually has ₹6.56b more liquid assets than total liabilities.

This surplus suggests that Dr. Lal PathLabs has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dr. Lal PathLabs boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Dr. Lal PathLabs grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dr. Lal PathLabs can strengthen its balance sheet over time. 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 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₹10.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So is Dr. Lal PathLabs's debt a risk? It doesn't seem so to us. 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. For example - Dr. Lal PathLabs has 2 warning signs we think you should be aware of.

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.