These 4 Measures Indicate That Alkyl Amines Chemicals (NSE:ALKYLAMINE) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Alkyl Amines Chemicals Limited (NSE:ALKYLAMINE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Alkyl Amines Chemicals

How Much Debt Does Alkyl Amines Chemicals Carry?

As you can see below, Alkyl Amines Chemicals had ₹232.9m of debt at March 2022, down from ₹474.9m a year prior. However, it does have ₹615.3m in cash offsetting this, leading to net cash of ₹382.4m.

A Look At Alkyl Amines Chemicals' Liabilities

According to the last reported balance sheet, Alkyl Amines Chemicals had liabilities of ₹3.28b due within 12 months, and liabilities of ₹536.1m due beyond 12 months. On the other hand, it had cash of ₹615.3m and ₹2.99b worth of receivables due within a year. So it has liabilities totalling ₹207.4m more than its cash and near-term receivables, combined.

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 ₹149.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Alkyl Amines Chemicals also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Alkyl Amines Chemicals if management cannot prevent a repeat of the 32% cut to EBIT 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 Alkyl Amines Chemicals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Alkyl Amines Chemicals 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, Alkyl Amines Chemicals's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Alkyl Amines Chemicals has ₹382.4m in net cash. So we don't have any problem with Alkyl Amines Chemicals's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Alkyl Amines Chemicals has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.