Gland Pharma (NSE:GLAND) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Gland Pharma Limited (NSE:GLAND) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Gland Pharma

What Is Gland Pharma's Debt?

The image below, which you can click on for greater detail, shows that Gland Pharma had debt of ₹2.79b at the end of September 2024, a reduction from ₹3.13b over a year. But it also has ₹28.2b in cash to offset that, meaning it has ₹25.4b net cash.

How Healthy Is Gland Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gland Pharma had liabilities of ₹15.4b due within 12 months and liabilities of ₹5.40b due beyond that. Offsetting these obligations, it had cash of ₹28.2b as well as receivables valued at ₹14.9b due within 12 months. So it can boast ₹22.3b more liquid assets than total liabilities.

This surplus suggests that Gland Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gland Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Gland Pharma has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gland Pharma 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. During the last three years, Gland Pharma produced sturdy free cash flow equating to 55% 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 we empathize with investors who find debt concerning, you should keep in mind that Gland Pharma has net cash of ₹25.4b, as well as more liquid assets than liabilities. So we don't think Gland Pharma's use of debt is risky. We'd be motivated to research the stock further if we found out that Gland Pharma insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.