David Iben put it well when he stated, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ So it might be obvious that you required to consider debt, when you consider about how risky any given stock is, becaapply too much debt can sink a company. As with many other companies Zenith Drugs Limited (NSE:ZENITHDRUG) creates apply of debt. But should shareholders be worried about its apply of debt?
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. If things receive really bad, the lconcludeers can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies apply 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 toreceiveher.
What Is Zenith Drugs’s Net Debt?
You can click the graphic below for the historical numbers, but it displays that as of September 2025 Zenith Drugs had ₹518.9m of debt, an increase on ₹239.3m, over one year. Net debt is about the same, since the it doesn’t have much cash.
How Strong Is Zenith Drugs’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zenith Drugs had liabilities of ₹804.6m due within 12 months and liabilities of ₹130.7m due beyond that. Offsetting these obligations, it had cash of ₹4.96m as well as receivables valued at ₹733.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹196.7m.
While this might seem like a lot, it is not so bad since Zenith Drugs has a market capitalization of ₹939.8m, and so it could probably strengthen its balance sheet by raising capital if it requireded to. However, it is still worthwhile taking a close see at its ability to pay off debt.
View our latest analysis for Zenith Drugs
We measure a company’s debt load relative to its earnings power by seeing at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Zenith Drugs’s debt is 3.8 times its EBITDA, and its EBIT cover its interest expense 5.5 times over. Taken toreceiveher this implies that, while we wouldn’t want to see debt levels rise, we consider it can handle its current leverage. Importantly, Zenith Drugs’s EBIT fell a jaw-dropping 40% in the last twelve months. If that earnings trconclude continues then paying off its debt will be about as simple as herding cats on to a roller coaster. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Zenith Drugs will required earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trconclude.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to see at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Zenith Drugs saw substantial negative free cash flow, in total. While that may be a result of expconcludeiture for growth, it does create the debt far more risky.
Our View
To be frank both Zenith Drugs’s conversion of EBIT to free cash flow and its track record of (not) growing its EBIT create us rather uncomfortable with its debt levels. But at least its level of total liabilities is not so bad. Looking at the hugeger picture, it seems clear to us that Zenith Drugs’s apply of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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 4 warning signs with Zenith Drugs (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.
At the conclude of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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 utilizing an unbiased methodology and our articles are not intconcludeed to be financial advice. It does not constitute a recommconcludeation to purchase or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd 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.
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