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

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 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. We note that Caplin Point Laboratories Limited (NSE:CAPLIPOINT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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

What Is Caplin Point Laboratories's Net Debt?

As you can see below, at the end of September 2020, Caplin Point Laboratories had ₹202.8m of debt, up from ₹29.0m a year ago. Click the image for more detail. But it also has ₹4.43b in cash to offset that, meaning it has ₹4.23b net cash.

How Healthy Is Caplin Point Laboratories' Balance Sheet?

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 these obligations, it had cash of ₹4.43b as well as receivables valued at ₹3.54b due within 12 months. So it actually has ₹5.94b more liquid assets than total liabilities.

This excess liquidity suggests that Caplin Point Laboratories is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Caplin Point Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Caplin Point Laboratories has increased its EBIT by 8.6% over twelve months, which should ease any concerns about debt repayment. 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 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 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 8.6% in the last twelve months. So we are not troubled with Caplin Point Laboratories's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Caplin Point Laboratories, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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