These 4 Measures Indicate That Sun Pharmaceutical Industries (NSE:SUNPHARMA) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Sun Pharmaceutical Industries had ₹12.9b of debt in March 2022, down from ₹33.4b, one year before. However, it does have ₹126.7b in cash offsetting this, leading to net cash of ₹113.8b.

How Strong Is Sun Pharmaceutical Industries' Balance Sheet?

According to the last reported balance sheet, Sun Pharmaceutical Industries had liabilities of ₹172.0b due within 12 months, and liabilities of ₹15.3b due beyond 12 months. On the other hand, it had cash of ₹126.7b and ₹111.8b worth of receivables due within a year. So it can boast ₹51.2b 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!

Fortunately, Sun Pharmaceutical Industries grew its EBIT by 8.9% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 last three years, Sun Pharmaceutical Industries recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sun Pharmaceutical Industries has ₹113.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹75b, being 87% of its EBIT. So is Sun Pharmaceutical Industries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Sun Pharmaceutical Industries that you should be aware of before investing here.

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.