Is Marksans Pharma (NSE:MARKSANS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Marksans Pharma Limited (NSE:MARKSANS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Marksans Pharma

What Is Marksans Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Marksans Pharma had ₹269.0m of debt in September 2020, down from ₹835.9m, one year before. But it also has ₹1.54b in cash to offset that, meaning it has ₹1.27b net cash.

How Healthy Is Marksans Pharma's Balance Sheet?

According to the last reported balance sheet, Marksans Pharma had liabilities of ₹2.70b due within 12 months, and liabilities of ₹279.9m due beyond 12 months. Offsetting this, it had ₹1.54b in cash and ₹2.94b in receivables that were due within 12 months. So it actually has ₹1.50b 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. Simply put, the fact that Marksans Pharma has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Marksans Pharma grew its EBIT by 120% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Marksans Pharma's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Marksans Pharma produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Marksans Pharma has net cash of ₹1.27b, as well as more liquid assets than liabilities. And we liked the look of last year's 120% year-on-year EBIT growth. So we don't think Marksans Pharma's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Marksans Pharma's earnings per share history for free.

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.

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