Is Ipca Laboratories (NSE:IPCALAB) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Ipca Laboratories Limited (NSE:IPCALAB) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ipca Laboratories

How Much Debt Does Ipca Laboratories Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Ipca Laboratories had ₹7.91b of debt, an increase on ₹2.52b, over one year. But on the other hand it also has ₹13.6b in cash, leading to a ₹5.69b net cash position.

A Look At Ipca Laboratories' Liabilities

According to the last reported balance sheet, Ipca Laboratories had liabilities of ₹14.7b due within 12 months, and liabilities of ₹6.04b due beyond 12 months. On the other hand, it had cash of ₹13.6b and ₹9.21b worth of receivables due within a year. So it actually has ₹2.11b 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 while it's hard to imagine that the ₹225.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Ipca Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Ipca Laboratories has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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. While Ipca Laboratories has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Ipca Laboratories recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Ipca Laboratories has ₹5.69b in net cash and a decent-looking balance sheet. So we are not troubled with Ipca Laboratories's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Ipca Laboratories insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.