These 4 Measures Indicate That Beta Drugs (NSE:BETA) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Beta Drugs Limited (NSE:BETA) does carry debt. But the more important question is: how much risk is that debt creating?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Beta Drugs

What Is Beta Drugs's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beta Drugs had ₹160.4m of debt in March 2023, down from ₹206.0m, one year before. However, its balance sheet shows it holds ₹191.6m in cash, so it actually has ₹31.2m net cash.

A Look At Beta Drugs' Liabilities

We can see from the most recent balance sheet that Beta Drugs had liabilities of ₹630.2m falling due within a year, and liabilities of ₹125.2m due beyond that. Offsetting these obligations, it had cash of ₹191.6m as well as receivables valued at ₹627.2m due within 12 months. So it can boast ₹63.5m more liquid assets than total liabilities.

This state of affairs indicates that Beta Drugs' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹7.92b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Beta Drugs boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Beta Drugs grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beta Drugs will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beta Drugs 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, Beta Drugs recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beta Drugs has net cash of ₹31.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So is Beta Drugs's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Beta Drugs (at least 1 which is a bit concerning) , 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.