Here's Why Mankind Pharma (NSE:MANKIND) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Mankind Pharma Limited (NSE:MANKIND) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Mankind Pharma

What Is Mankind Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Mankind Pharma had ₹4.72b of debt, an increase on ₹1.67b, over one year. However, its balance sheet shows it holds ₹47.3b in cash, so it actually has ₹42.5b net cash.

How Healthy Is Mankind Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mankind Pharma had liabilities of ₹28.9b due within 12 months and liabilities of ₹2.99b due beyond that. Offsetting this, it had ₹47.3b in cash and ₹12.8b in receivables that were due within 12 months. So it can boast ₹28.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Mankind Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mankind Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Mankind Pharma has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mankind Pharma can strengthen its balance sheet over time. 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. Mankind Pharma 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. Looking at the most recent three years, Mankind Pharma recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mankind Pharma has net cash of ₹42.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 25% over the last year. So we don't think Mankind Pharma's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Mankind Pharma insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.