We Think Alkyl Amines Chemicals (NSE:ALKYLAMINE) Can Manage Its Debt With Ease

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. As with many other companies Alkyl Amines Chemicals Limited (NSE:ALKYLAMINE) makes use of debt. But should shareholders be worried about its use of debt?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Alkyl Amines Chemicals

What Is Alkyl Amines Chemicals's Debt?

The chart below, which you can click on for greater detail, shows that Alkyl Amines Chemicals had ₹350.1m in debt in September 2021; about the same as the year before. However, it does have ₹1.41b in cash offsetting this, leading to net cash of ₹1.06b.

How Healthy Is Alkyl Amines Chemicals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alkyl Amines Chemicals had liabilities of ₹2.43b due within 12 months and liabilities of ₹560.9m due beyond that. Offsetting this, it had ₹1.41b in cash and ₹2.12b in receivables that were due within 12 months. So it actually has ₹537.7m more liquid assets than total liabilities.

This state of affairs indicates that Alkyl Amines Chemicals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹172.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Alkyl Amines Chemicals has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Alkyl Amines Chemicals grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Alkyl Amines Chemicals will need 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 trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Alkyl Amines Chemicals recorded free cash flow of 44% of its EBIT, which is weaker 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 Alkyl Amines Chemicals has net cash of ₹1.06b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 46% over the last year. So is Alkyl Amines Chemicals's debt a risk? It doesn't seem so to us. 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 Alkyl Amines Chemicals (1 makes us a bit uncomfortable) 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.

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.

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