Dr. Reddy's Laboratories (NSE:DRREDDY) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Dr. Reddy's Laboratories Limited (NSE:DRREDDY) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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?

You can click the graphic below for the historical numbers, but it shows that Dr. Reddy's Laboratories had ₹10.3b of debt in June 2023, down from ₹21.7b, one year before. However, its balance sheet shows it holds ₹60.3b in cash, so it actually has ₹50.0b net cash.

A Look At Dr. Reddy's Laboratories' Liabilities

Zooming in on the latest balance sheet data, we can see that Dr. Reddy's Laboratories had liabilities of ₹80.8b due within 12 months and liabilities of ₹9.01b due beyond that. On the other hand, it had cash of ₹60.3b and ₹77.2b worth of receivables due within a year. So it can boast ₹47.7b more liquid assets than total liabilities.

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

On top of that, Dr. Reddy's Laboratories grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dr. Reddy's Laboratories'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. Dr. Reddy's Laboratories 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. In the last three years, Dr. Reddy's Laboratories's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dr. Reddy's Laboratories has net cash of ₹50.0b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 78% over the last year. So is Dr. Reddy's Laboratories's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Dr. Reddy's Laboratories, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.