We Think Sun Pharmaceutical Industries (NSE:SUNPHARMA) Can Manage Its Debt With Ease

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. We note that Sun Pharmaceutical Industries Limited (NSE:SUNPHARMA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sun Pharmaceutical Industries

What Is Sun Pharmaceutical Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Sun Pharmaceutical Industries had ₹62.0b of debt, an increase on ₹9.31b, over one year. However, it does have ₹151.4b in cash offsetting this, leading to net cash of ₹89.5b.

How Strong Is Sun Pharmaceutical Industries' Balance Sheet?

According to the last reported balance sheet, Sun Pharmaceutical Industries had liabilities of ₹199.1b due within 12 months, and liabilities of ₹15.2b due beyond 12 months. Offsetting this, it had ₹151.4b in cash and ₹114.8b in receivables that were due within 12 months. So it can boast ₹51.9b 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 13% 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 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.

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. Over the most recent three years, Sun Pharmaceutical Industries recorded free cash flow worth 65% 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 ₹89.5b in net cash and a decent-looking balance sheet. 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. To that end, you should be aware of the 1 warning sign we've spotted with Sun Pharmaceutical Industries .

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.