Here's Why Marksans Pharma (NSE:MARKSANS) 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.' 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. We can see that Marksans Pharma Limited (NSE:MARKSANS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Marksans Pharma's Net Debt?

As you can see below, at the end of September 2024, Marksans Pharma had ₹1.98b of debt, up from ₹1.11b a year ago. Click the image for more detail. However, it does have ₹6.72b in cash offsetting this, leading to net cash of ₹4.74b.

How Strong Is Marksans Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Marksans Pharma had liabilities of ₹4.44b due within 12 months and liabilities of ₹1.62b due beyond that. Offsetting this, it had ₹6.72b in cash and ₹5.67b in receivables that were due within 12 months. So it can boast ₹6.33b more liquid assets than total liabilities.

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

Check out our latest analysis for Marksans Pharma

And we also note warmly that Marksans Pharma grew its EBIT by 10% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Marksans 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Marksans 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, Marksans Pharma's free cash flow amounted to 23% of its EBIT, less 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 Marksans Pharma has ₹4.74b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 10% over the last year. So we are not troubled with Marksans Pharma's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Marksans 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.