Does Dr. Reddy's Laboratories (NSE:DRREDDY) Have A Healthy Balance Sheet?

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.' 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 Dr. Reddy's Laboratories Limited (NSE:DRREDDY) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

View our latest analysis for Dr. Reddy's Laboratories

What Is Dr. Reddy's Laboratories's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Dr. Reddy's Laboratories had debt of ₹46.2b, up from ₹16.1b in one year. But on the other hand it also has ₹59.9b in cash, leading to a ₹13.7b net cash position.

How Healthy Is Dr. Reddy's Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Dr. Reddy's Laboratories had liabilities of ₹132.0b falling due within a year, and liabilities of ₹27.5b due beyond that. On the other hand, it had cash of ₹59.9b and ₹95.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.24b.

Having regard to Dr. Reddy's Laboratories' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹931.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Dr. Reddy's Laboratories also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Dr. Reddy's Laboratories grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dr. Reddy's Laboratories 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Dr. Reddy's Laboratories 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. Looking at the most recent three years, Dr. Reddy's Laboratories recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dr. Reddy's Laboratories has ₹13.7b in net cash. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't have any problem with Dr. Reddy's Laboratories's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dr. Reddy's Laboratories is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.