Is Gland Pharma (NSE:GLAND) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Gland Pharma Limited (NSE:GLAND) does have debt on its balance sheet. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 at September 2023 Gland Pharma had debt of ₹3.57b, up from ₹45.4m in one year. However, it does have ₹21.4b in cash offsetting this, leading to net cash of ₹17.9b.

How Strong Is Gland Pharma's Balance Sheet?

According to the last reported balance sheet, Gland Pharma had liabilities of ₹15.4b due within 12 months, and liabilities of ₹4.50b due beyond 12 months. Offsetting this, it had ₹21.4b in cash and ₹14.6b in receivables that were due within 12 months. So it can boast ₹16.2b 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.

On the other hand, Gland Pharma's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Gland Pharma reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gland Pharma has ₹17.9b in net cash and a decent-looking balance sheet. So we don't have any problem with Gland Pharma's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Gland Pharma you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.