Does Ajanta Pharma (NSE:AJANTPHARM) Have A Healthy Balance Sheet?

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. As with many other companies Ajanta Pharma Limited (NSE:AJANTPHARM) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ajanta Pharma

What Is Ajanta Pharma's Debt?

You can click the graphic below for the historical numbers, but it shows that Ajanta Pharma had ₹377.5m of debt in March 2021, down from ₹786.2m, one year before. However, its balance sheet shows it holds ₹3.78b in cash, so it actually has ₹3.40b net cash.

How Strong Is Ajanta Pharma's Balance Sheet?

We can see from the most recent balance sheet that Ajanta Pharma had liabilities of ₹6.49b falling due within a year, and liabilities of ₹1.34b due beyond that. Offsetting this, it had ₹3.78b in cash and ₹8.33b in receivables that were due within 12 months. So it can boast ₹4.28b more liquid assets than total liabilities.

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

On top of that, Ajanta Pharma grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ajanta Pharma can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ajanta Pharma 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. Looking at the most recent three years, Ajanta Pharma recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Ajanta Pharma has ₹3.40b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 39% over the last year. So we don't think Ajanta Pharma's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ajanta Pharma is showing 2 warning signs in our investment analysis , you should know about...

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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