Does Lincoln Pharmaceuticals (NSE:LINCOLN) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Lincoln Pharmaceuticals Limited (NSE:LINCOLN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lincoln Pharmaceuticals

How Much Debt Does Lincoln Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that Lincoln Pharmaceuticals had ₹181.8m of debt in September 2020, down from ₹366.9m, one year before. However, its balance sheet shows it holds ₹1.06b in cash, so it actually has ₹876.2m net cash.

How Strong Is Lincoln Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lincoln Pharmaceuticals had liabilities of ₹883.7m due within 12 months and liabilities of ₹101.3m due beyond that. On the other hand, it had cash of ₹1.06b and ₹1.35b worth of receivables due within a year. So it can boast ₹1.43b more liquid assets than total liabilities.

This excess liquidity suggests that Lincoln Pharmaceuticals is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Lincoln Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Lincoln Pharmaceuticals grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lincoln Pharmaceuticals'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, a company can only pay off debt with cold hard cash, not accounting profits. Lincoln 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, Lincoln Pharmaceuticals recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Lincoln Pharmaceuticals has ₹876.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹837m, being 91% of its EBIT. So is Lincoln Pharmaceuticals's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Lincoln Pharmaceuticals , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you’re looking to trade Lincoln Pharmaceuticals, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.