These 4 Measures Indicate That Cipla (NSE:CIPLA) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Cipla Limited (NSE:CIPLA) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cipla

How Much Debt Does Cipla Carry?

As you can see below, Cipla had ₹4.61b of debt at September 2024, down from ₹9.61b a year prior. However, it does have ₹87.1b in cash offsetting this, leading to net cash of ₹82.5b.

A Look At Cipla's Liabilities

The latest balance sheet data shows that Cipla had liabilities of ₹54.5b due within a year, and liabilities of ₹7.45b falling due after that. On the other hand, it had cash of ₹87.1b and ₹55.9b worth of receivables due within a year. So it actually has ₹81.0b 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.

Also good is that Cipla grew its EBIT at 14% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cipla has ₹82.5b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't think Cipla's use of debt is risky. 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 Cipla's earnings per share history for free.

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.