AstraZeneca Pharma India (NSE:ASTRAZEN) Seems To Use Debt Quite Sensibly

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 AstraZeneca Pharma India Limited (NSE:ASTRAZEN) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AstraZeneca Pharma India

What Is AstraZeneca Pharma India's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 AstraZeneca Pharma India had ₹171.2m of debt, an increase on ₹53.5m, over one year. But on the other hand it also has ₹4.97b in cash, leading to a ₹4.80b net cash position.

A Look At AstraZeneca Pharma India's Liabilities

Zooming in on the latest balance sheet data, we can see that AstraZeneca Pharma India had liabilities of ₹4.75b due within 12 months and liabilities of ₹871.2m due beyond that. Offsetting these obligations, it had cash of ₹4.97b as well as receivables valued at ₹1.50b due within 12 months. So it actually has ₹849.2m more liquid assets than total liabilities.

This state of affairs indicates that AstraZeneca Pharma India'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 ₹195.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, AstraZeneca Pharma India boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that AstraZeneca Pharma India has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is AstraZeneca Pharma India's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AstraZeneca Pharma India 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. In the last three years, AstraZeneca Pharma India's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AstraZeneca Pharma India has net cash of ₹4.80b, as well as more liquid assets than liabilities. And it also grew its EBIT by 7.4% over the last year. So we are not troubled with AstraZeneca Pharma India's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with AstraZeneca Pharma India , and understanding them should be part of your investment process.

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.