Ipca Laboratories (NSE:IPCALAB) Has A Pretty Healthy Balance Sheet

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 Ipca Laboratories Limited (NSE:IPCALAB) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ipca Laboratories

What Is Ipca Laboratories's Debt?

As you can see below, at the end of September 2022, Ipca Laboratories had ₹7.34b of debt, up from ₹3.07b a year ago. Click the image for more detail. But it also has ₹13.0b in cash to offset that, meaning it has ₹5.63b net cash.

How Strong Is Ipca Laboratories' Balance Sheet?

According to the last reported balance sheet, Ipca Laboratories had liabilities of ₹13.8b due within 12 months, and liabilities of ₹6.54b due beyond 12 months. Offsetting this, it had ₹13.0b in cash and ₹11.1b in receivables that were due within 12 months. So it can boast ₹3.63b more liquid assets than total liabilities.

Having regard to Ipca Laboratories' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹205.8b company is short on cash, but still worth keeping an eye on the 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.

The modesty of its debt load may become crucial for Ipca Laboratories if management cannot prevent a repeat of the 35% cut to EBIT 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 Ipca Laboratories 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Ipca Laboratories's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ipca Laboratories has ₹5.63b in net cash and a decent-looking balance sheet. So we are not troubled with Ipca Laboratories's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ipca Laboratories is showing 2 warning signs in our investment analysis , you should know about...

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.