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

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 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 can see that Ipca Laboratories Limited (NSE:IPCALAB) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ipca Laboratories

What Is Ipca Laboratories's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Ipca Laboratories had ₹14.8b of debt, an increase on ₹8.07b, over one year. But it also has ₹21.8b in cash to offset that, meaning it has ₹6.95b net cash.

How Strong Is Ipca Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Ipca Laboratories had liabilities of ₹18.1b falling due within a year, and liabilities of ₹9.05b due beyond that. Offsetting these obligations, it had cash of ₹21.8b as well as receivables valued at ₹11.9b due within 12 months. So it can boast ₹6.51b more liquid assets than total liabilities.

This surplus suggests that Ipca Laboratories has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ipca Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Ipca Laboratories's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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. In the last three years, Ipca Laboratories's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ipca Laboratories has net cash of ₹6.95b, as well as more liquid assets than liabilities. So we don't have any problem with Ipca Laboratories's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Ipca Laboratories , and understanding them should be part of your investment process.

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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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.