Is Sun Pharma Advanced Research (NSE:SPARC) Using Too Much Debt?

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. We note that Sun Pharma Advanced Research Company Limited (NSE:SPARC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sun Pharma Advanced Research

What Is Sun Pharma Advanced Research's Debt?

You can click the graphic below for the historical numbers, but it shows that Sun Pharma Advanced Research had ₹156.8m of debt in March 2023, down from ₹792.2m, one year before. However, it does have ₹4.02b in cash offsetting this, leading to net cash of ₹3.87b.

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

According to the last reported balance sheet, Sun Pharma Advanced Research had liabilities of ₹1.79b due within 12 months, and liabilities of ₹1.38b due beyond 12 months. Offsetting these obligations, it had cash of ₹4.02b as well as receivables valued at ₹374.2m due within 12 months. So it can boast ₹1.23b more liquid assets than total liabilities.

Having regard to Sun Pharma Advanced Research's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹80.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Sun Pharma Advanced Research boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sun Pharma Advanced Research will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Sun Pharma Advanced Research wasn't profitable at an EBIT level, but managed to grow its revenue by 63%, to ₹2.3b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sun Pharma Advanced Research?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Sun Pharma Advanced Research had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₹845m of cash and made a loss of ₹2.4b. With only ₹3.87b on the balance sheet, it would appear that its going to need to raise capital again soon. Sun Pharma Advanced Research's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Sun Pharma Advanced Research you should be aware of, and 1 of them doesn't sit too well with us.

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.

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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.