Alphageo (India) (NSE:ALPHAGEO) Has A Pretty Healthy Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Alphageo (India) Limited (NSE:ALPHAGEO) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alphageo (India)

What Is Alphageo (India)'s Debt?

As you can see below, Alphageo (India) had ₹261.5m of debt at March 2020, down from ₹277.7m a year prior. However, it does have ₹876.3m in cash offsetting this, leading to net cash of ₹614.9m.

How Healthy Is Alphageo (India)'s Balance Sheet?

According to the last reported balance sheet, Alphageo (India) had liabilities of ₹689.2m due within 12 months, and liabilities of ₹8.92m due beyond 12 months. Offsetting these obligations, it had cash of ₹876.3m as well as receivables valued at ₹877.2m due within 12 months. So it actually has ₹1.06b more liquid assets than total liabilities.

This surplus strongly suggests that Alphageo (India) has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Alphageo (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Alphageo (India) if management cannot prevent a repeat of the 66% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Alphageo (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Alphageo (India) 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. In the last three years, Alphageo (India)'s free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Alphageo (India) has net cash of ₹614.9m, as well as more liquid assets than liabilities. So we don't have any problem with Alphageo (India)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Alphageo (India) 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. 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.
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