Is Sun Pharmaceutical Industries (NSE:SUNPHARMA) 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.' 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. Importantly, Sun Pharmaceutical Industries Limited (NSE:SUNPHARMA) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sun Pharmaceutical Industries

What Is Sun Pharmaceutical Industries's Net Debt?

As you can see below, at the end of September 2022, Sun Pharmaceutical Industries had ₹43.7b of debt, up from ₹17.8b a year ago. Click the image for more detail. However, it does have ₹138.4b in cash offsetting this, leading to net cash of ₹94.7b.

How Healthy Is Sun Pharmaceutical Industries' Balance Sheet?

We can see from the most recent balance sheet that Sun Pharmaceutical Industries had liabilities of ₹167.0b falling due within a year, and liabilities of ₹13.9b due beyond that. On the other hand, it had cash of ₹138.4b and ₹123.9b worth of receivables due within a year. So it actually has ₹81.3b more liquid assets than total liabilities.

This surplus suggests that Sun Pharmaceutical Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sun Pharmaceutical Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Sun Pharmaceutical Industries grew its EBIT by 9.1% in the last year, making that debt load look even more manageable. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sun Pharmaceutical Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Sun Pharmaceutical Industries produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sun Pharmaceutical Industries has ₹94.7b in net cash and a decent-looking balance sheet. So is Sun Pharmaceutical Industries's debt a risk? It doesn't seem so to us. 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 instance, we've identified 4 warning signs for Sun Pharmaceutical Industries that you should be aware of.

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.