Sun Pharmaceutical Industries (NSE:SUNPHARMA) Has A Rock Solid Balance Sheet

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.' 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 is this debt a concern to shareholders?

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. 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. 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. When we think about a company's use of debt, we first look at 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 Sun Pharmaceutical Industries had ₹19.3b of debt in September 2023, down from ₹43.7b, one year before. However, its balance sheet shows it holds ₹148.3b in cash, so it actually has ₹129.1b net cash.

A Look At Sun Pharmaceutical Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Sun Pharmaceutical Industries had liabilities of ₹150.2b due within 12 months and liabilities of ₹12.2b due beyond that. Offsetting this, it had ₹148.3b in cash and ₹113.5b in receivables that were due within 12 months. So it actually has ₹99.3b 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 ultimately the future profitability of the business will decide if Sun Pharmaceutical Industries 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 72% 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 it is always sensible to investigate a company's debt, in this case Sun Pharmaceutical Industries has ₹129.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in ₹96b. So we don't think Sun Pharmaceutical Industries's use of debt is risky. 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. For example - Sun Pharmaceutical Industries has 1 warning sign we think you should be aware of.

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.

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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.