Cipla (NSE:CIPLA) Could Easily Take On More 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 note that Cipla Limited (NSE:CIPLA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cipla

How Much Debt Does Cipla Carry?

The image below, which you can click on for greater detail, shows that Cipla had debt of ₹8.24b at the end of March 2022, a reduction from ₹17.7b over a year. However, it does have ₹41.2b in cash offsetting this, leading to net cash of ₹33.0b.

How Strong Is Cipla's Balance Sheet?

We can see from the most recent balance sheet that Cipla had liabilities of ₹49.1b falling due within a year, and liabilities of ₹10.7b due beyond that. On the other hand, it had cash of ₹41.2b and ₹34.3b worth of receivables due within a year. So it actually has ₹15.7b more liquid assets than total liabilities.

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

Fortunately, Cipla grew its EBIT by 7.2% 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 Cipla'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. Cipla 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. During the last three years, Cipla generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Cipla has net cash of ₹33.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹26b, being 86% of its EBIT. So we don't think Cipla's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Cipla, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.