Is Dr. Reddy's Laboratories (NSE:DRREDDY) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Dr. Reddy's Laboratories Limited (NSE:DRREDDY) does use debt in its business. 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Dr. Reddy's Laboratories

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

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Dr. Reddy's Laboratories had ₹27.0b of debt, an increase on ₹10.3b, over one year. However, it does have ₹94.6b in cash offsetting this, leading to net cash of ₹67.7b.

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 ₹105.7b due within 12 months and liabilities of ₹15.0b due beyond that. On the other hand, it had cash of ₹94.6b and ₹81.1b worth of receivables due within a year. So it actually has ₹55.0b more liquid assets than total liabilities.

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

Dr. Reddy's Laboratories's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, Dr. Reddy's Laboratories recorded free cash flow of 48% 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 investigate a company's debt, in this case Dr. Reddy's Laboratories has ₹67.7b in net cash and a decent-looking balance sheet. 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 1 warning sign in our investment analysis , you should know about...

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.

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.