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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Mankind Pharma Limited (NSE:MANKIND) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mankind Pharma

How Much Debt Does Mankind Pharma Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Mankind Pharma had ₹2.07b of debt, an increase on ₹1.70b, over one year. But on the other hand it also has ₹33.9b in cash, leading to a ₹31.8b net cash position.

How Strong Is Mankind Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mankind Pharma had liabilities of ₹21.2b due within 12 months and liabilities of ₹2.68b due beyond that. On the other hand, it had cash of ₹33.9b and ₹8.95b worth of receivables due within a year. So it can boast ₹18.9b 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. Simply put, the fact that Mankind Pharma has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Mankind Pharma has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mankind Pharma'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. While Mankind Pharma 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. In the last three years, Mankind Pharma's free cash flow amounted to 27% of its EBIT, less 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 ₹31.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 22% over the last year. So we don't think Mankind Pharma's use of debt is risky. We'd be motivated to research the stock further if we found out that Mankind Pharma insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.