Does Cipla (NSE:CIPLA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Cipla Limited (NSE:CIPLA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Cipla

How Much Debt Does Cipla Carry?

As you can see below, Cipla had ₹8.03b of debt at March 2023, down from ₹10.6b a year prior. But on the other hand it also has ₹62.6b in cash, leading to a ₹54.6b net cash position.

A Look At Cipla's Liabilities

According to the last reported balance sheet, Cipla had liabilities of ₹51.1b due within 12 months, and liabilities of ₹6.40b due beyond 12 months. Offsetting these obligations, it had cash of ₹62.6b as well as receivables valued at ₹43.1b due within 12 months. So it can boast ₹48.2b more liquid assets than total liabilities.

This surplus suggests that Cipla has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Cipla has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Cipla grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cipla can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the most recent three years, Cipla recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cipla has net cash of ₹54.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 32% over the last year. So we don't think Cipla's use of debt is risky. Another factor that would give us confidence in Cipla would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.