Is Glenmark Pharmaceuticals (NSE:GLENMARK) A Risky Investment?

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 Glenmark Pharmaceuticals Limited (NSE:GLENMARK) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Glenmark Pharmaceuticals

How Much Debt Does Glenmark Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that Glenmark Pharmaceuticals had ₹15.6b of debt in September 2024, down from ₹49.2b, one year before. However, its balance sheet shows it holds ₹18.2b in cash, so it actually has ₹2.59b net cash.

A Look At Glenmark Pharmaceuticals' Liabilities

The latest balance sheet data shows that Glenmark Pharmaceuticals had liabilities of ₹61.8b due within a year, and liabilities of ₹6.05b falling due after that. Offsetting this, it had ₹18.2b in cash and ₹28.6b in receivables that were due within 12 months. So its liabilities total ₹21.1b more than the combination of its cash and short-term receivables.

Since publicly traded Glenmark Pharmaceuticals shares are worth a total of ₹437.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Glenmark Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably Glenmark Pharmaceuticals's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish 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 Glenmark 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Glenmark 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. During the last three years, Glenmark Pharmaceuticals burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Glenmark Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of ₹2.59b. So while Glenmark Pharmaceuticals does not have a great balance sheet, it's certainly not too bad. Even though Glenmark Pharmaceuticals lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.