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.' 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. We can see that Gland Pharma Limited (NSE:GLAND) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gland Pharma

What Is Gland Pharma's Net Debt?

As you can see below, at the end of March 2024, Gland Pharma had ₹3.72b of debt, up from ₹44.5m a year ago. Click the image for more detail. But on the other hand it also has ₹18.4b in cash, leading to a ₹14.7b net cash position.

A Look At Gland Pharma's Liabilities

The latest balance sheet data shows that Gland Pharma had liabilities of ₹14.0b due within a year, and liabilities of ₹5.39b falling due after that. Offsetting this, it had ₹18.4b in cash and ₹17.1b in receivables that were due within 12 months. So it can boast ₹16.1b 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. Simply put, the fact that Gland Pharma has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Gland Pharma has increased its EBIT by 7.0% 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 ultimately the future profitability of the business will decide if Gland Pharma can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Gland Pharma recorded free cash flow of 39% 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 Gland Pharma has ₹14.7b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 7.0% over the last year. So we are not troubled with Gland Pharma's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Gland Pharma .

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.