These 4 Measures Indicate That Bliss GVS Pharma (NSE:BLISSGVS) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Bliss GVS Pharma Limited (NSE:BLISSGVS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bliss GVS Pharma

What Is Bliss GVS Pharma's Net Debt?

As you can see below, Bliss GVS Pharma had ₹976.4m of debt at March 2021, down from ₹1.21b a year prior. But it also has ₹1.61b in cash to offset that, meaning it has ₹630.3m net cash.

A Look At Bliss GVS Pharma's Liabilities

Zooming in on the latest balance sheet data, we can see that Bliss GVS Pharma had liabilities of ₹2.04b due within 12 months and liabilities of ₹452.4m due beyond that. Offsetting these obligations, it had cash of ₹1.61b as well as receivables valued at ₹4.65b due within 12 months. So it can boast ₹3.77b more liquid assets than total liabilities.

This luscious liquidity implies that Bliss GVS Pharma's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Bliss GVS Pharma has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Bliss GVS Pharma has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bliss GVS Pharma will need earnings to service that debt. 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. Bliss GVS Pharma may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Bliss GVS Pharma created free cash flow amounting to 10% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bliss GVS Pharma has net cash of ₹630.3m, as well as more liquid assets than liabilities. So we don't have any problem with Bliss GVS Pharma's use of debt. 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 we think you should be aware of.

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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