Does Zydus Lifesciences (NSE:ZYDUSLIFE) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Zydus Lifesciences Limited (NSE:ZYDUSLIFE) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zydus Lifesciences

How Much Debt Does Zydus Lifesciences Carry?

The chart below, which you can click on for greater detail, shows that Zydus Lifesciences had ₹1.91b in debt in September 2024; about the same as the year before. However, it does have ₹25.0b in cash offsetting this, leading to net cash of ₹23.0b.

How Healthy Is Zydus Lifesciences' Balance Sheet?

The latest balance sheet data shows that Zydus Lifesciences had liabilities of ₹53.5b due within a year, and liabilities of ₹19.4b falling due after that. Offsetting this, it had ₹25.0b in cash and ₹46.7b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Zydus Lifesciences' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹905.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Zydus Lifesciences also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Zydus Lifesciences grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zydus Lifesciences 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zydus Lifesciences 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. Over the most recent three years, Zydus Lifesciences recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Zydus Lifesciences's liabilities, but we can be reassured by the fact it has has net cash of ₹23.0b. And it impressed us with its EBIT growth of 29% over the last year. So is Zydus Lifesciences'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Zydus Lifesciences (at least 1 which is potentially serious) , 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.