Is Aurobindo Pharma (NSE:AUROPHARMA) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Aurobindo Pharma Limited (NSE:AUROPHARMA) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Aurobindo Pharma

What Is Aurobindo Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Aurobindo Pharma had ₹80.9b of debt, an increase on ₹62.5b, over one year. However, it also had ₹68.7b in cash, and so its net debt is ₹12.2b.

How Healthy Is Aurobindo Pharma's Balance Sheet?

We can see from the most recent balance sheet that Aurobindo Pharma had liabilities of ₹143.4b falling due within a year, and liabilities of ₹28.7b due beyond that. Offsetting these obligations, it had cash of ₹68.7b as well as receivables valued at ₹54.0b due within 12 months. So its liabilities total ₹49.4b more than the combination of its cash and short-term receivables.

Of course, Aurobindo Pharma has a market capitalization of ₹704.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Aurobindo Pharma's net debt is only 0.19 times its EBITDA. And its EBIT easily covers its interest expense, being 63.2 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Aurobindo Pharma has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aurobindo 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Aurobindo Pharma reported free cash flow worth 4.3% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Aurobindo Pharma's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Taking all this data into account, it seems to us that Aurobindo Pharma takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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 Aurobindo Pharma that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.