Does Bliss GVS Pharma (NSE:BLISSGVS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Bliss GVS Pharma Limited (NSE:BLISSGVS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Bliss GVS Pharma

What Is Bliss GVS Pharma's Debt?

The chart below, which you can click on for greater detail, shows that Bliss GVS Pharma had ₹995.5m in debt in September 2023; about the same as the year before. However, it does have ₹1.63b in cash offsetting this, leading to net cash of ₹633.8m.

A Look At Bliss GVS Pharma's Liabilities

According to the last reported balance sheet, Bliss GVS Pharma had liabilities of ₹1.72b due within 12 months, and liabilities of ₹620.5m due beyond 12 months. On the other hand, it had cash of ₹1.63b and ₹3.79b worth of receivables due within a year. So it can boast ₹3.08b more liquid assets than total liabilities.

It's good to see that Bliss GVS Pharma has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Bliss GVS Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Bliss GVS Pharma saw its EBIT decline by 8.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is Bliss GVS Pharma's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bliss GVS 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. In the last three years, Bliss GVS Pharma created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bliss GVS Pharma has ₹633.8m in net cash and a decent-looking balance sheet. So we are not troubled with Bliss GVS Pharma's debt use. 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. For example Bliss GVS Pharma has 2 warning signs (and 1 which is potentially serious) we think 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.