Neuland Laboratories (NSE:NEULANDLAB) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Neuland Laboratories Limited (NSE:NEULANDLAB) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Neuland Laboratories

What Is Neuland Laboratories's Debt?

As you can see below, Neuland Laboratories had ₹954.9m of debt at September 2023, down from ₹2.00b a year prior. However, its balance sheet shows it holds ₹1.37b in cash, so it actually has ₹410.5m net cash.

A Look At Neuland Laboratories' Liabilities

Zooming in on the latest balance sheet data, we can see that Neuland Laboratories had liabilities of ₹4.03b due within 12 months and liabilities of ₹1.29b due beyond that. Offsetting these obligations, it had cash of ₹1.37b as well as receivables valued at ₹3.25b due within 12 months. So it has liabilities totalling ₹708.3m more than its cash and near-term receivables, combined.

Having regard to Neuland Laboratories' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹72.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Neuland Laboratories also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Neuland Laboratories grew its EBIT by 196% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Neuland Laboratories can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the most recent three years, Neuland Laboratories recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Neuland Laboratories has ₹410.5m in net cash. And we liked the look of last year's 196% year-on-year EBIT growth. So is Neuland Laboratories's debt a risk? It doesn't seem so to us. 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.

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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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.