GlaxoSmithKline Pharmaceuticals (NSE:GLAXO) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 ₹276.1m of debt in September 2021, down from ₹439.9m, one year before. But on the other hand it also has ₹11.9b in cash, leading to a ₹11.6b net cash position.

A Look At GlaxoSmithKline Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that GlaxoSmithKline Pharmaceuticals had liabilities of ₹14.8b due within 12 months and liabilities of ₹2.76b due beyond that. Offsetting these obligations, it had cash of ₹11.9b as well as receivables valued at ₹1.78b due within 12 months. So its liabilities total ₹3.91b more than the combination of its cash and short-term receivables.

This state of affairs indicates that GlaxoSmithKline Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹260.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, GlaxoSmithKline Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that GlaxoSmithKline Pharmaceuticals has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. 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 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 ₹11.6b. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in ₹7.9b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with GlaxoSmithKline Pharmaceuticals (including 1 which doesn't sit too well with us) .

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.