Stock Analysis

Marksans Pharma (NSE:MARKSANS) Seems To Use Debt Quite Sensibly

NSEI:MARKSANS
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Marksans Pharma Limited (NSE:MARKSANS) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Marksans Pharma

What Is Marksans Pharma's Debt?

As you can see below, at the end of March 2022, Marksans Pharma had ₹412.9m of debt, up from ₹237.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹3.50b in cash, so it actually has ₹3.08b net cash.

debt-equity-history-analysis
NSEI:MARKSANS Debt to Equity History June 21st 2022

A Look At Marksans Pharma's Liabilities

We can see from the most recent balance sheet that Marksans Pharma had liabilities of ₹3.56b falling due within a year, and liabilities of ₹609.1m due beyond that. Offsetting this, it had ₹3.50b in cash and ₹3.98b in receivables that were due within 12 months. So it actually has ₹3.30b more liquid assets than total liabilities.

This excess liquidity suggests that Marksans Pharma is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Marksans Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Marksans Pharma has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Marksans Pharma will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 49% 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 Marksans Pharma has net cash of ₹3.08b, as well as more liquid assets than liabilities. So we don't have any problem with Marksans Pharma's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Marksans Pharma has 2 warning signs we think you should be aware of.

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.