Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Suven Pharmaceuticals Limited (NSE:SUVENPHAR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Suven Pharmaceuticals Carry?
The image below, which you can click on for greater detail, shows that Suven Pharmaceuticals had debt of ₹955.7m at the end of March 2022, a reduction from ₹1.41b over a year. However, it does have ₹5.29b in cash offsetting this, leading to net cash of ₹4.33b.
A Look At Suven Pharmaceuticals' Liabilities
We can see from the most recent balance sheet that Suven Pharmaceuticals had liabilities of ₹2.10b falling due within a year, and liabilities of ₹921.1m due beyond that. Offsetting this, it had ₹5.29b in cash and ₹2.37b in receivables that were due within 12 months. So it can boast ₹4.63b more liquid assets than total liabilities.
This surplus suggests that Suven Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Suven Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Suven Pharmaceuticals has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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 Suven Pharmaceuticals'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suven Pharmaceuticals 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, Suven Pharmaceuticals produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Suven Pharmaceuticals has net cash of ₹4.33b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 32% over the last year. So is Suven Pharmaceuticals'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Suven Pharmaceuticals , and understanding them should be part of your investment process.
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.