Does IOL Chemicals and Pharmaceuticals (NSE:IOLCP) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for IOL Chemicals and Pharmaceuticals

What Is IOL Chemicals and Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 IOL Chemicals and Pharmaceuticals had debt of ₹1.28b, up from ₹590.5m in one year. However, its balance sheet shows it holds ₹1.54b in cash, so it actually has ₹256.2m net cash.

How Strong Is IOL Chemicals and Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, IOL Chemicals and Pharmaceuticals had liabilities of ₹5.30b due within 12 months, and liabilities of ₹760.8m due beyond 12 months. On the other hand, it had cash of ₹1.54b and ₹4.74b worth of receivables due within a year. So it can boast ₹223.7m more liquid assets than total liabilities.

This state of affairs indicates that IOL Chemicals and Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹17.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, IOL Chemicals and Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that IOL Chemicals and Pharmaceuticals's load is not too heavy, because its EBIT was down 45% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if IOL Chemicals and Pharmaceuticals can strengthen its balance sheet over time. 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. IOL Chemicals and 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, IOL Chemicals and Pharmaceuticals saw substantial negative free cash flow, in total. 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

While we empathize with investors who find debt concerning, you should keep in mind that IOL Chemicals and Pharmaceuticals has net cash of ₹256.2m, as well as more liquid assets than liabilities. So while IOL Chemicals and Pharmaceuticals does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for IOL Chemicals and Pharmaceuticals that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.