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.' 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. We can see that Sun Pharmaceutical Industries Limited (NSE:SUNPHARMA) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sun Pharmaceutical Industries

What Is Sun Pharmaceutical Industries's Debt?

As you can see below, Sun Pharmaceutical Industries had ₹28.4b of debt at March 2024, down from ₹62.0b a year prior. However, it does have ₹191.1b in cash offsetting this, leading to net cash of ₹162.6b.

How Healthy Is Sun Pharmaceutical Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sun Pharmaceutical Industries had liabilities of ₹169.8b due within 12 months and liabilities of ₹13.7b due beyond that. On the other hand, it had cash of ₹191.1b and ₹113.1b worth of receivables due within a year. So it can boast ₹120.6b 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. Simply put, the fact that Sun Pharmaceutical Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Sun Pharmaceutical Industries grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Sun Pharmaceutical Industries produced sturdy free cash flow equating to 73% 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 ₹162.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in ₹99b. 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. Be aware that Sun Pharmaceutical Industries is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.