We Think Caplin Point Laboratories (NSE:CAPLIPOINT) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Caplin Point Laboratories Limited (NSE:CAPLIPOINT) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Caplin Point Laboratories

How Much Debt Does Caplin Point Laboratories Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Caplin Point Laboratories had ₹202.8m of debt, an increase on ₹7.13m, over one year. But on the other hand it also has ₹4.43b in cash, leading to a ₹4.23b net cash position.

A Look At Caplin Point Laboratories's Liabilities

Zooming in on the latest balance sheet data, we can see that Caplin Point Laboratories had liabilities of ₹1.81b due within 12 months and liabilities of ₹223.4m due beyond that. Offsetting this, it had ₹4.43b in cash and ₹3.54b in receivables that were due within 12 months. So it can boast ₹5.94b more liquid assets than total liabilities.

This surplus suggests that Caplin Point Laboratories is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Caplin Point Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Caplin Point Laboratories grew its EBIT by 5.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. While Caplin Point Laboratories 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, Caplin Point Laboratories's free cash flow amounted to 22% 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 ₹4.23b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 5.3% in the last twelve months. So we don't have any problem with Caplin Point Laboratories's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Caplin Point Laboratories's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

When trading Caplin Point Laboratories or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.