We Think Zydus Lifesciences (NSE:ZYDUSLIFE) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Zydus Lifesciences Limited (NSE:ZYDUSLIFE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zydus Lifesciences

What Is Zydus Lifesciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zydus Lifesciences had ₹11.6b of debt in March 2023, down from ₹42.0b, one year before. However, its balance sheet shows it holds ₹14.2b in cash, so it actually has ₹2.57b net cash.

A Look At Zydus Lifesciences' Liabilities

The latest balance sheet data shows that Zydus Lifesciences had liabilities of ₹55.3b due within a year, and liabilities of ₹5.37b falling due after that. Offsetting these obligations, it had cash of ₹14.2b as well as receivables valued at ₹44.2b due within 12 months. So its liabilities total ₹2.31b more than the combination of its cash and short-term receivables.

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 it's very unlikely that the ₹602.6b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zydus Lifesciences boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Zydus Lifesciences has increased its EBIT by 8.5% over twelve months, which should ease any concerns about debt repayment. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zydus Lifesciences has ₹2.57b in net cash. So we don't think Zydus Lifesciences's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Zydus Lifesciences , and understanding them should be part of your investment process.

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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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.