Is Neuland Laboratories (NSE:NEULANDLAB) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Neuland Laboratories Limited (NSE:NEULANDLAB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Neuland Laboratories

What Is Neuland Laboratories's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Neuland Laboratories had ₹825.1m of debt in March 2024, down from ₹1.22b, one year before. However, it does have ₹1.17b in cash offsetting this, leading to net cash of ₹342.9m.

A Look At Neuland Laboratories' Liabilities

Zooming in on the latest balance sheet data, we can see that Neuland Laboratories had liabilities of ₹4.28b due within 12 months and liabilities of ₹1.22b due beyond that. Offsetting this, it had ₹1.17b in cash and ₹3.74b in receivables that were due within 12 months. So it has liabilities totalling ₹595.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that Neuland Laboratories' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹80.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Neuland Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Neuland Laboratories has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Neuland Laboratories's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Neuland 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. In the last three years, Neuland Laboratories's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Neuland Laboratories has ₹342.9m in net cash. And it impressed us with its EBIT growth of 75% over the last year. So we don't think Neuland Laboratories's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Neuland Laboratories, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.