These 4 Measures Indicate That Neuland Laboratories (NSE:NEULANDLAB) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Neuland Laboratories Limited (NSE:NEULANDLAB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Neuland Laboratories

How Much Debt Does Neuland Laboratories Carry?

As you can see below, Neuland Laboratories had ₹941.5m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹1.90b in cash, leading to a ₹962.1m net cash position.

A Look At Neuland Laboratories' Liabilities

The latest balance sheet data shows that Neuland Laboratories had liabilities of ₹4.13b due within a year, and liabilities of ₹1.35b falling due after that. Offsetting this, it had ₹1.90b in cash and ₹3.06b in receivables that were due within 12 months. So it has liabilities totalling ₹523.0m 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 ₹227.8b company is struggling for cash, we still think it's worth monitoring its 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!

But the other side of the story is that Neuland Laboratories saw its EBIT decline by 4.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Neuland Laboratories 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, Neuland Laboratories's free cash flow amounted to 38% 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 ₹962.1m in net cash. So we don't have any problem with Neuland Laboratories'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Neuland Laboratories you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.