Here's Why Alankit (NSE:ALANKIT) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Alankit Limited (NSE:ALANKIT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Alankit

What Is Alankit's Debt?

As you can see below, Alankit had ₹128.9m of debt at September 2023, down from ₹537.5m a year prior. However, it does have ₹242.2m in cash offsetting this, leading to net cash of ₹113.3m.

A Look At Alankit's Liabilities

Zooming in on the latest balance sheet data, we can see that Alankit had liabilities of ₹1.16b due within 12 months and liabilities of ₹181.9m due beyond that. On the other hand, it had cash of ₹242.2m and ₹694.6m worth of receivables due within a year. So it has liabilities totalling ₹404.4m more than its cash and near-term receivables, combined.

Of course, Alankit has a market capitalization of ₹4.61b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Alankit also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Alankit made a loss at the EBIT level, last year, it was also good to see that it generated ₹138m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Alankit's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Alankit 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 year, Alankit saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Alankit has ₹113.3m in net cash. So we are not troubled with Alankit's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Alankit (1 is significant) you should be aware of.

At the end 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 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.