Does Sun Pharmaceutical Industries (NSE:SUNPHARMA) Have A Healthy Balance Sheet?

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 Pharmaceutical Industries Limited (NSE:SUNPHARMA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sun Pharmaceutical Industries

How Much Debt Does Sun Pharmaceutical Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sun Pharmaceutical Industries had ₹20.8b of debt, an increase on ₹14.9b, over one year. However, its balance sheet shows it holds ₹201.2b in cash, so it actually has ₹180.4b net cash.

How Healthy Is Sun Pharmaceutical Industries' Balance Sheet?

According to the last reported balance sheet, Sun Pharmaceutical Industries had liabilities of ₹172.6b due within 12 months, and liabilities of ₹14.8b due beyond 12 months. On the other hand, it had cash of ₹201.2b and ₹129.9b worth of receivables due within a year. So it can boast ₹143.8b more liquid assets than total liabilities.

This short term liquidity is a sign that Sun Pharmaceutical Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sun Pharmaceutical Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sun Pharmaceutical Industries grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sun Pharmaceutical Industries'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sun Pharmaceutical Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Sun Pharmaceutical Industries recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sun Pharmaceutical Industries has net cash of ₹180.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in ₹108b. So we don't think Sun Pharmaceutical Industries's use of debt is risky. 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, we've discovered 1 warning sign for Sun Pharmaceutical Industries that you should be aware of before investing here.

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.

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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.