Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Suven Life Sciences Limited (NSE:SUVEN) does carry debt. But the more important question is: how much risk is that debt creating?

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 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Suven Life Sciences

What Is Suven Life Sciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2019 Suven Life Sciences had ₹380.2m of debt, an increase on ₹339.9m, over one year. But on the other hand it also has ₹2.43b in cash, leading to a ₹2.05b net cash position.

A Look At Suven Life Sciences's Liabilities

Zooming in on the latest balance sheet data, we can see that Suven Life Sciences had liabilities of ₹1.49b due within 12 months and liabilities of ₹588.8m due beyond that. Offsetting this, it had ₹2.43b in cash and ₹2.06b in receivables that were due within 12 months. So it actually has ₹2.42b more liquid assets than total liabilities.

This surplus suggests that Suven Life Sciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suven Life Sciences has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Suven Life Sciences's load is not too heavy, because its EBIT was down 22% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Suven Life Sciences 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. Suven Life Sciences 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 last three years, Suven Life Sciences reported free cash flow worth 11% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Suven Life Sciences has ₹2.0b in net cash and a decent-looking balance sheet. So we don't have any problem with Suven Life Sciences's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Suven Life Sciences's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.