Does Morepen Laboratories (NSE:MOREPENLAB) Have A Healthy Balance Sheet?

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 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. As with many other companies Morepen Laboratories Limited (NSE:MOREPENLAB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Morepen Laboratories

How Much Debt Does Morepen Laboratories Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Morepen Laboratories had debt of ₹290.0m, up from ₹251.6m in one year. However, its balance sheet shows it holds ₹521.2m in cash, so it actually has ₹231.2m net cash.

How Strong Is Morepen Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Morepen Laboratories had liabilities of ₹4.02b falling due within a year, and liabilities of ₹439.3m due beyond that. Offsetting these obligations, it had cash of ₹521.2m as well as receivables valued at ₹3.25b due within 12 months. So its liabilities total ₹687.0m more than the combination of its cash and short-term receivables.

Of course, Morepen Laboratories has a market capitalization of ₹25.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Morepen Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Morepen Laboratories grew its EBIT by 148% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Morepen Laboratories will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Morepen Laboratories may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Morepen Laboratories burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Morepen Laboratories has ₹231.2m in net cash. And we liked the look of last year's 148% year-on-year EBIT growth. So we are not troubled with Morepen Laboratories's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Morepen Laboratories, you may well want to click here to check an interactive graph of its earnings per share history.

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.