Stock Analysis

Here's Why Suven Pharmaceuticals (NSE:SUVENPHAR) Can Manage Its Debt Responsibly

NSEI:SUVENPHAR
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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 Suven Pharmaceuticals Limited (NSE:SUVENPHAR) does use debt in its business. But is this debt a concern to shareholders?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Suven Pharmaceuticals

What Is Suven Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Suven Pharmaceuticals had ₹1.41b of debt in March 2021, down from ₹1.85b, one year before. However, it does have ₹1.90b in cash offsetting this, leading to net cash of ₹490.2m.

debt-equity-history-analysis
NSEI:SUVENPHAR Debt to Equity History August 4th 2021

A Look At Suven Pharmaceuticals' Liabilities

The latest balance sheet data shows that Suven Pharmaceuticals had liabilities of ₹2.20b due within a year, and liabilities of ₹739.1m falling due after that. Offsetting this, it had ₹1.90b in cash and ₹1.05b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Suven Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹143.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Suven Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Suven Pharmaceuticals grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Suven Pharmaceuticals can strengthen its balance sheet over time. 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. 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. Looking at the most recent three years, Suven Pharmaceuticals recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Suven Pharmaceuticals has ₹490.2m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 13% over the last year. So is Suven Pharmaceuticals's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Suven Pharmaceuticals you should know about.

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. 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.
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