Is Aurobindo Pharma (NSE:AUROPHARMA) A Risky Investment?

Warren Buffett famously said, '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 Aurobindo Pharma Limited (NSE:AUROPHARMA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Aurobindo Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Aurobindo Pharma had ₹82.6b of debt, an increase on ₹66.5b, over one year. On the flip side, it has ₹82.4b in cash leading to net debt of about ₹273.7m.

How Healthy Is Aurobindo Pharma's Balance Sheet?

We can see from the most recent balance sheet that Aurobindo Pharma had liabilities of ₹146.8b falling due within a year, and liabilities of ₹24.6b due beyond that. On the other hand, it had cash of ₹82.4b and ₹64.0b worth of receivables due within a year. So it has liabilities totalling ₹25.0b more than its cash and near-term receivables, combined.

Of course, Aurobindo Pharma has a market capitalization of ₹638.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Aurobindo Pharma 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 Aurobindo Pharma

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.

Aurobindo Pharma has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.0041 and EBIT of 11.1 times the interest expense. So relative to past earnings, the debt load seems trivial. The good news is that Aurobindo Pharma has increased its EBIT by 3.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Aurobindo Pharma'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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Aurobindo Pharma recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

Aurobindo Pharma's net debt to EBITDA was a real positive on this analysis, as was its interest cover. But truth be told its conversion of EBIT to free cash flow had us nibbling our nails. Considering this range of data points, we think Aurobindo Pharma is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Aurobindo Pharma 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.