Is Tatva Chintan Pharma Chem (NSE:TATVA) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Tatva Chintan Pharma Chem Limited (NSE:TATVA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Tatva Chintan Pharma Chem's Debt?

As you can see below, at the end of March 2025, Tatva Chintan Pharma Chem had ₹363.9m of debt, up from ₹142.7m a year ago. Click the image for more detail. However, because it has a cash reserve of ₹141.0m, its net debt is less, at about ₹222.9m.

A Look At Tatva Chintan Pharma Chem's Liabilities

Zooming in on the latest balance sheet data, we can see that Tatva Chintan Pharma Chem had liabilities of ₹960.3m due within 12 months and liabilities of ₹14.0m due beyond that. Offsetting this, it had ₹141.0m in cash and ₹909.8m in receivables that were due within 12 months. So it actually has ₹76.5m more liquid assets than total liabilities.

This state of affairs indicates that Tatva Chintan Pharma Chem's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹23.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Tatva Chintan Pharma Chem has virtually no net debt, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Tatva Chintan Pharma Chem

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Tatva Chintan Pharma Chem's low debt to EBITDA ratio of 0.60 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 6.5 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. It is just as well that Tatva Chintan Pharma Chem's load is not too heavy, because its EBIT was down 73% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tatva Chintan Pharma Chem 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Tatva Chintan Pharma Chem saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both Tatva Chintan Pharma Chem's EBIT growth rate and its conversion of EBIT to free cash flow were discouraging. But at least its net debt to EBITDA is a gleaming silver lining to those clouds. When we consider all the factors discussed, it seems to us that Tatva Chintan Pharma Chem is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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 - Tatva Chintan Pharma Chem has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.