Is Panacea Biotec (NSE:PANACEABIO) A Risky Investment?

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 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. We can see that Panacea Biotec Limited (NSE:PANACEABIO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Panacea Biotec

How Much Debt Does Panacea Biotec Carry?

As you can see below, at the end of September 2024, Panacea Biotec had ₹215.7m of debt, up from ₹206.8m a year ago. Click the image for more detail. But it also has ₹1.77b in cash to offset that, meaning it has ₹1.56b net cash.

How Strong Is Panacea Biotec's Balance Sheet?

We can see from the most recent balance sheet that Panacea Biotec had liabilities of ₹3.28b falling due within a year, and liabilities of ₹863.5m due beyond that. Offsetting these obligations, it had cash of ₹1.77b as well as receivables valued at ₹670.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.70b.

Given Panacea Biotec has a market capitalization of ₹26.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Panacea Biotec boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Panacea Biotec 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.

Over 12 months, Panacea Biotec reported revenue of ₹5.5b, which is a gain of 6.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Panacea Biotec?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Panacea Biotec had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₹177m and booked a ₹147m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₹1.56b. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Panacea Biotec has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.