Is Unichem Laboratories (NSE:UNICHEMLAB) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Unichem Laboratories Limited (NSE:UNICHEMLAB) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Unichem Laboratories

How Much Debt Does Unichem Laboratories Carry?

As you can see below, Unichem Laboratories had ₹1.54b of debt at September 2020, down from ₹1.87b a year prior. But on the other hand it also has ₹4.09b in cash, leading to a ₹2.55b net cash position.

How Healthy Is Unichem Laboratories's Balance Sheet?

The latest balance sheet data shows that Unichem Laboratories had liabilities of ₹5.54b due within a year, and liabilities of ₹535.4m falling due after that. On the other hand, it had cash of ₹4.09b and ₹3.99b worth of receivables due within a year. So it actually has ₹2.01b more liquid assets than total liabilities.

This surplus suggests that Unichem Laboratories has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Over 12 months, Unichem Laboratories reported revenue of ₹13b, which is a gain of 2.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Unichem Laboratories?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Unichem Laboratories had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₹3.8b of cash and made a loss of ₹206m. However, it has net cash of ₹2.55b, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Take risks, for example - Unichem Laboratories has 2 warning signs (and 1 which is a bit unpleasant) we think 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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