Alkyl Amines Chemicals (NSE:ALKYLAMINE) Could Easily Take On More Debt

Warren Buffett famously said, '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 Alkyl Amines Chemicals Limited (NSE:ALKYLAMINE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Alkyl Amines Chemicals

What Is Alkyl Amines Chemicals's Debt?

As you can see below, Alkyl Amines Chemicals had ₹215.9m of debt at March 2021, down from ₹859.0m a year prior. However, it does have ₹1.60b in cash offsetting this, leading to net cash of ₹1.38b.

A Look At Alkyl Amines Chemicals' Liabilities

We can see from the most recent balance sheet that Alkyl Amines Chemicals had liabilities of ₹2.82b falling due within a year, and liabilities of ₹710.8m due beyond that. Offsetting these obligations, it had cash of ₹1.60b as well as receivables valued at ₹2.28b due within 12 months. So it actually has ₹348.8m more liquid assets than total liabilities.

Having regard to Alkyl Amines Chemicals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹193.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Alkyl Amines Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Alkyl Amines Chemicals grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alkyl Amines Chemicals'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Alkyl Amines Chemicals 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 most recent three years, Alkyl Amines Chemicals recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Alkyl Amines Chemicals has net cash of ₹1.38b, as well as more liquid assets than liabilities. And we liked the look of last year's 76% year-on-year EBIT growth. So we don't think Alkyl Amines Chemicals's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Alkyl Amines Chemicals you should know about.

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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