Is Solara Active Pharma Sciences (NSE:SOLARA) A Risky Investment?

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.' 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. As with many other companies Solara Active Pharma Sciences Limited (NSE:SOLARA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Solara Active Pharma Sciences

What Is Solara Active Pharma Sciences's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Solara Active Pharma Sciences had ₹10.4b of debt, an increase on ₹6.21b, over one year. However, it also had ₹463.8m in cash, and so its net debt is ₹9.91b.

How Healthy Is Solara Active Pharma Sciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Solara Active Pharma Sciences had liabilities of ₹10.7b due within 12 months and liabilities of ₹3.54b due beyond that. On the other hand, it had cash of ₹463.8m and ₹6.03b worth of receivables due within a year. So it has liabilities totalling ₹7.76b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Solara Active Pharma Sciences is worth ₹14.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Solara Active Pharma Sciences'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.

In the last year Solara Active Pharma Sciences had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₹12b. To be frank that doesn't bode well.

Caveat Emptor

While Solara Active Pharma Sciences's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹1.1b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹4.5b of cash over the last year. So in short it's a really risky stock. 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 instance, we've identified 1 warning sign for Solara Active Pharma Sciences that 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.