Cipla (NSE:CIPLA) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We can see that Cipla Limited (NSE:CIPLA) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that CIPLA is potentially overvalued!

What Is Cipla's Debt?

As you can see below, Cipla had ₹8.53b of debt at September 2022, down from ₹11.0b a year prior. But on the other hand it also has ₹41.9b in cash, leading to a ₹33.3b net cash position.

How Strong Is Cipla's Balance Sheet?

According to the last reported balance sheet, Cipla had liabilities of ₹53.1b due within 12 months, and liabilities of ₹5.84b due beyond 12 months. Offsetting this, it had ₹41.9b in cash and ₹39.7b in receivables that were due within 12 months. So it can boast ₹22.7b 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. Simply put, the fact that Cipla has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Cipla saw its EBIT decline by 6.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cipla can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cipla 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. Over the most recent three years, Cipla recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cipla has net cash of ₹33.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹20b, being 75% 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.