These 4 Measures Indicate That IOL Chemicals and Pharmaceuticals (NSE:IOLCP) Is Using Debt Reasonably Well

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. We note that IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is IOL Chemicals and Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 IOL Chemicals and Pharmaceuticals had debt of ₹1.17b, up from ₹327.6m in one year. But on the other hand it also has ₹2.09b in cash, leading to a ₹922.5m net cash position.

How Strong Is IOL Chemicals and Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, IOL Chemicals and Pharmaceuticals had liabilities of ₹6.10b due within 12 months, and liabilities of ₹845.0m due beyond 12 months. Offsetting this, it had ₹2.09b in cash and ₹5.34b in receivables that were due within 12 months. So it actually has ₹491.6m 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 ₹32.9b 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!

View our latest analysis for IOL Chemicals and Pharmaceuticals

On the other hand, IOL Chemicals and Pharmaceuticals saw its EBIT drop by 3.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine IOL Chemicals and 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 ₹922.5m, as well as more liquid assets than liabilities. So we are not troubled with IOL Chemicals and Pharmaceuticals's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for IOL Chemicals and 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.