Marksans Pharma (NSE:MARKSANS) Could Easily Take On More Debt

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. We can see that Marksans Pharma Limited (NSE:MARKSANS) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Marksans Pharma

What Is Marksans Pharma's Net Debt?

The chart below, which you can click on for greater detail, shows that Marksans Pharma had ₹237.4m in debt in March 2021; about the same as the year before. However, it does have ₹2.12b in cash offsetting this, leading to net cash of ₹1.89b.

How Strong Is Marksans Pharma's Balance Sheet?

We can see from the most recent balance sheet that Marksans Pharma had liabilities of ₹2.98b falling due within a year, and liabilities of ₹245.0m due beyond that. On the other hand, it had cash of ₹2.12b and ₹2.71b worth of receivables due within a year. So it actually has ₹1.61b 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.

In addition to that, we're happy to report that Marksans Pharma has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 51% 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 ₹1.89b, as well as more liquid assets than liabilities. And we liked the look of last year's 78% year-on-year EBIT growth. So we don't think Marksans Pharma's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Marksans Pharma is showing 1 warning sign in our investment analysis , you should know about...

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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