Is Strides Pharma Science (NSE:STAR) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Strides Pharma Science Limited (NSE:STAR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Strides Pharma Science

What Is Strides Pharma Science's Debt?

As you can see below, at the end of March 2022, Strides Pharma Science had ₹27.9b of debt, up from ₹21.0b a year ago. Click the image for more detail. However, it also had ₹1.87b in cash, and so its net debt is ₹26.0b.

A Look At Strides Pharma Science's Liabilities

We can see from the most recent balance sheet that Strides Pharma Science had liabilities of ₹34.1b falling due within a year, and liabilities of ₹11.8b due beyond that. Offsetting this, it had ₹1.87b in cash and ₹12.1b in receivables that were due within 12 months. So it has liabilities totalling ₹31.9b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₹30.8b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Strides Pharma Science can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Strides Pharma Science made a loss at the EBIT level, and saw its revenue drop to ₹31b, which is a fall of 7.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Strides Pharma Science produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹2.4b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹4.0b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Strides Pharma Science that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.