Does Ipca Laboratories (NSE:IPCALAB) Have A Healthy Balance Sheet?

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 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 note that Ipca Laboratories Limited (NSE:IPCALAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ipca Laboratories

What Is Ipca Laboratories's Net Debt?

The image below, which you can click on for greater detail, shows that Ipca Laboratories had debt of ₹1.86b at the end of March 2021, a reduction from ₹4.82b over a year. But it also has ₹8.87b in cash to offset that, meaning it has ₹7.01b net cash.

How Healthy Is Ipca Laboratories' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ipca Laboratories had liabilities of ₹11.3b due within 12 months and liabilities of ₹2.19b due beyond that. On the other hand, it had cash of ₹8.87b and ₹8.14b worth of receivables due within a year. So it actually has ₹3.49b more liquid assets than total liabilities.

This state of affairs indicates that Ipca Laboratories' 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 ₹259.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Ipca Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Ipca Laboratories grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its 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 Ipca Laboratories'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. Ipca Laboratories 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, Ipca Laboratories produced sturdy free cash flow equating to 50% 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

While it is always sensible to investigate a company's debt, in this case Ipca Laboratories has ₹7.01b in net cash and a decent-looking balance sheet. And we liked the look of last year's 80% year-on-year EBIT growth. So is Ipca Laboratories's debt a risk? It doesn't seem so to us. 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 example - Ipca Laboratories has 1 warning sign we think you should be aware of.

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.

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