Does Unichem Laboratories (NSE:UNICHEMLAB) Have A Healthy 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.' 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 Unichem Laboratories Limited (NSE:UNICHEMLAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Unichem Laboratories

What Is Unichem Laboratories's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Unichem Laboratories had debt of ₹3.49b, up from ₹1.19b in one year. However, its balance sheet shows it holds ₹3.73b in cash, so it actually has ₹236.2m net cash.

How Healthy Is Unichem Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Unichem Laboratories had liabilities of ₹5.52b falling due within a year, and liabilities of ₹1.48b due beyond that. Offsetting this, it had ₹3.73b in cash and ₹5.09b in receivables that were due within 12 months. So it actually has ₹1.81b more liquid assets than total liabilities.

This short term liquidity is a sign that Unichem Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Unichem Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Unichem Laboratories will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Unichem Laboratories wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to ₹13b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Unichem Laboratories?

Although Unichem Laboratories had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹212m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example - Unichem Laboratories has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.