These 4 Measures Indicate That Zydus Lifesciences (NSE:ZYDUSLIFE) Is Using Debt Safely

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 Zydus Lifesciences Limited (NSE:ZYDUSLIFE) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zydus Lifesciences

What Is Zydus Lifesciences's Net Debt?

The chart below, which you can click on for greater detail, shows that Zydus Lifesciences had ₹1.50b 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 ₹23.5b.

A Look At Zydus Lifesciences' Liabilities

According to the last reported balance sheet, Zydus Lifesciences had liabilities of ₹53.5b due within 12 months, and liabilities of ₹19.4b due beyond 12 months. On the other hand, it had cash of ₹25.0b and ₹46.7b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Zydus Lifesciences' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹972.0b company is short on cash, but still worth keeping an eye on the 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.

In addition to that, we're happy to report that Zydus Lifesciences has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 58% 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 ₹23.5b. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't think Zydus Lifesciences's use of debt is risky. 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. Be aware that Zydus Lifesciences is showing 1 warning sign in our investment analysis , you should know about...

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.