Is Caplin Point Laboratories (NSE:CAPLIPOINT) A Risky Investment?

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.' 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. As with many other companies Caplin Point Laboratories Limited (NSE:CAPLIPOINT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Caplin Point Laboratories

How Much Debt Does Caplin Point Laboratories Carry?

As you can see below, Caplin Point Laboratories had ₹170.7m of debt at March 2021, down from ₹364.8m a year prior. But it also has ₹4.70b in cash to offset that, meaning it has ₹4.53b net cash.

How Healthy Is Caplin Point Laboratories' Balance Sheet?

The latest balance sheet data shows that Caplin Point Laboratories had liabilities of ₹1.43b due within a year, and liabilities of ₹173.9m falling due after that. Offsetting these obligations, it had cash of ₹4.70b as well as receivables valued at ₹3.87b due within 12 months. So it can boast ₹6.97b more liquid assets than total liabilities.

This short term liquidity is a sign that Caplin Point Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Caplin Point Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Caplin Point Laboratories grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 Caplin Point Laboratories's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Caplin Point Laboratories 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, Caplin Point Laboratories's free cash flow amounted to 25% of its EBIT, less 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 Caplin Point Laboratories has net cash of ₹4.53b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So is Caplin Point Laboratories's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Caplin Point Laboratories that you should be aware of before investing here.

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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