Here's Why Thyrocare Technologies (NSE:THYROCARE) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Thyrocare Technologies Limited (NSE:THYROCARE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Thyrocare Technologies

What Is Thyrocare Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Thyrocare Technologies had ₹239.1m of debt, an increase on none, over one year. But on the other hand it also has ₹993.4m in cash, leading to a ₹754.3m net cash position.

How Healthy Is Thyrocare Technologies' Balance Sheet?

We can see from the most recent balance sheet that Thyrocare Technologies had liabilities of ₹686.3m falling due within a year, and liabilities of ₹364.2m due beyond that. Offsetting this, it had ₹993.4m in cash and ₹553.6m in receivables that were due within 12 months. So it can boast ₹496.5m more liquid assets than total liabilities.

Having regard to Thyrocare Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹32.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Thyrocare Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Thyrocare Technologies's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Thyrocare Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Thyrocare Technologies 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, Thyrocare Technologies recorded free cash flow worth 63% 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 Thyrocare Technologies has ₹754.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Thyrocare Technologies'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. For instance, we've identified 1 warning sign for Thyrocare Technologies that you should be aware of.

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.