Zydus Lifesciences (NSE:ZYDUSLIFE) Could Easily Take On More 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.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

See our latest analysis for Zydus Lifesciences

What Is Zydus Lifesciences's Net Debt?

As you can see below, Zydus Lifesciences had ₹1.50b of debt at September 2023, down from ₹24.2b a year prior. However, it does have ₹15.2b in cash offsetting this, leading to net cash of ₹13.7b.

How Healthy Is Zydus Lifesciences' Balance Sheet?

The latest balance sheet data shows that Zydus Lifesciences had liabilities of ₹43.6b due within a year, and liabilities of ₹5.76b falling due after that. Offsetting this, it had ₹15.2b in cash and ₹39.2b in receivables that were due within 12 months. So it can boast ₹4.99b more liquid assets than 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 ₹684.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Zydus Lifesciences boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Zydus Lifesciences grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zydus Lifesciences's ability to maintain a healthy balance sheet going forward. 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. While Zydus Lifesciences has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Zydus Lifesciences produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zydus Lifesciences has ₹13.7b in net cash and a decent-looking balance sheet. And we liked the look of last year's 69% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Zydus Lifesciences has 1 warning sign we think you should be aware of.

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.