GlaxoSmithKline Pharmaceuticals (NSE:GLAXO) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GlaxoSmithKline Pharmaceuticals

What Is GlaxoSmithKline Pharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that GlaxoSmithKline Pharmaceuticals had ₹232.4m of debt in September 2022, down from ₹276.1m, one year before. But it also has ₹13.1b in cash to offset that, meaning it has ₹12.8b net cash.

How Healthy Is GlaxoSmithKline Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that GlaxoSmithKline Pharmaceuticals had liabilities of ₹13.0b falling due within a year, and liabilities of ₹2.65b due beyond that. On the other hand, it had cash of ₹13.1b and ₹1.66b worth of receivables due within a year. So its liabilities total ₹895.8m more than the combination of its cash and short-term receivables.

Having regard to GlaxoSmithKline Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹213.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, GlaxoSmithKline Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, GlaxoSmithKline Pharmaceuticals saw its EBIT drop by 2.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine GlaxoSmithKline Pharmaceuticals's ability to maintain a healthy balance sheet going forward. 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. While GlaxoSmithKline Pharmaceuticals 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. During the last three years, GlaxoSmithKline Pharmaceuticals produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about GlaxoSmithKline Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of ₹12.8b. And it impressed us with free cash flow of ₹3.8b, being 76% of its EBIT. So we don't think GlaxoSmithKline Pharmaceuticals's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for GlaxoSmithKline Pharmaceuticals that you should be aware of.

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.