Does Gland Pharma (NSE:GLAND) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Gland Pharma Limited (NSE:GLAND) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gland Pharma

What Is Gland Pharma's Debt?

As you can see below, at the end of March 2024, Gland Pharma had ₹3.20b of debt, up from ₹38.2m a year ago. Click the image for more detail. However, it does have ₹18.4b in cash offsetting this, leading to net cash of ₹15.2b.

How Strong Is Gland Pharma's Balance Sheet?

According to the last reported balance sheet, Gland Pharma had liabilities of ₹14.0b due within 12 months, and liabilities of ₹5.39b due beyond 12 months. On the other hand, it had cash of ₹18.4b and ₹18.1b worth of receivables due within a year. So it can boast ₹17.1b more liquid assets than total liabilities.

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

Also good is that Gland Pharma grew its EBIT at 12% over the last year, further increasing its ability to manage 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 Gland Pharma'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 company can only pay off debt with cold hard cash, not accounting profits. While Gland Pharma 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. In the last three years, Gland Pharma's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gland Pharma has ₹15.2b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with Gland Pharma's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with Gland Pharma .

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.

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