These 4 Measures Indicate That Eris Lifesciences (NSE:ERIS) Is Using Debt Safely

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 Eris Lifesciences Limited (NSE:ERIS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Eris Lifesciences

What Is Eris Lifesciences's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Eris Lifesciences had debt of ₹572.2m, up from ₹93.1m in one year. But on the other hand it also has ₹2.19b in cash, leading to a ₹1.62b net cash position.

How Healthy Is Eris Lifesciences' Balance Sheet?

We can see from the most recent balance sheet that Eris Lifesciences had liabilities of ₹2.00b falling due within a year, and liabilities of ₹1.64b due beyond that. On the other hand, it had cash of ₹2.19b and ₹1.84b worth of receivables due within a year. So it actually has ₹394.0m more liquid assets than total liabilities.

This state of affairs indicates that Eris Lifesciences' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹84.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Eris Lifesciences boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Eris Lifesciences has increased its EBIT by 8.4% over twelve months, which should ease any concerns about debt repayment. 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 Eris Lifesciences's ability to maintain a healthy balance sheet going forward. 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. While Eris Lifesciences 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. During the last three years, Eris Lifesciences produced sturdy free cash flow equating to 64% 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 Eris Lifesciences has ₹1.62b in net cash and a decent-looking balance sheet. So is Eris Lifesciences's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Eris Lifesciences has 1 warning sign we think you should be aware of.

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.