Does GlaxoSmithKline Pharmaceuticals (NSE:GLAXO) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for GlaxoSmithKline Pharmaceuticals

What Is GlaxoSmithKline Pharmaceuticals's Net Debt?

As you can see below, GlaxoSmithKline Pharmaceuticals had ₹200.8m of debt at March 2022, down from ₹346.3m a year prior. But on the other hand it also has ₹28.3b in cash, leading to a ₹28.1b net cash position.

How Healthy Is GlaxoSmithKline Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GlaxoSmithKline Pharmaceuticals had liabilities of ₹17.0b due within 12 months and liabilities of ₹2.72b due beyond that. Offsetting this, it had ₹28.3b in cash and ₹2.77b in receivables that were due within 12 months. So it can boast ₹11.4b more liquid assets than total liabilities.

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

Fortunately, GlaxoSmithKline Pharmaceuticals grew its EBIT by 9.0% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GlaxoSmithKline Pharmaceuticals 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. GlaxoSmithKline Pharmaceuticals 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. Over the last three years, GlaxoSmithKline Pharmaceuticals recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that GlaxoSmithKline Pharmaceuticals has net cash of ₹28.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in ₹7.8b. So is GlaxoSmithKline Pharmaceuticals'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for GlaxoSmithKline Pharmaceuticals that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.