Is Sun Pharma Advanced Research (NSE:SPARC) 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 Sun Pharma Advanced Research Company Limited (NSE:SPARC) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sun Pharma Advanced Research

What Is Sun Pharma Advanced Research's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Sun Pharma Advanced Research had debt of ₹1.50b, up from ₹1.06b in one year. However, because it has a cash reserve of ₹829.9m, its net debt is less, at about ₹670.1m.

How Strong Is Sun Pharma Advanced Research's Balance Sheet?

According to the last reported balance sheet, Sun Pharma Advanced Research had liabilities of ₹2.03b due within 12 months, and liabilities of ₹882.8m due beyond 12 months. Offsetting these obligations, it had cash of ₹829.9m as well as receivables valued at ₹256.0m due within 12 months. So its liabilities total ₹1.82b more than the combination of its cash and short-term receivables.

Of course, Sun Pharma Advanced Research has a market capitalization of ₹65.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Sun Pharma Advanced Research has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sun Pharma Advanced Research 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, Sun Pharma Advanced Research made a loss at the EBIT level, and saw its revenue drop to ₹997m, which is a fall of 59%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Sun Pharma Advanced Research's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹2.3b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹2.8b of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sun Pharma Advanced Research that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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