Windlas Biotech (NSE:WINDLAS) Seems To Use Debt Quite Sensibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Windlas Biotech Limited (NSE:WINDLAS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Windlas Biotech

What Is Windlas Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Windlas Biotech had debt of ₹151.6m, up from ₹22.4m in one year. But it also has ₹2.13b in cash to offset that, meaning it has ₹1.98b net cash.

How Healthy Is Windlas Biotech's Balance Sheet?

According to the last reported balance sheet, Windlas Biotech had liabilities of ₹2.71b due within 12 months, and liabilities of ₹47.9m due beyond 12 months. Offsetting this, it had ₹2.13b in cash and ₹1.87b in receivables that were due within 12 months. So it can boast ₹1.24b more liquid assets than total liabilities.

This short term liquidity is a sign that Windlas Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Windlas Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Windlas Biotech grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Windlas Biotech 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Windlas Biotech 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. In the last three years, Windlas Biotech created free cash flow amounting to 20% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Windlas Biotech has ₹1.98b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 26% over the last year. So is Windlas Biotech's debt a risk? It doesn't seem so to us. 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 Windlas Biotech .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.