Is Alkem Laboratories (NSE:ALKEM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Alkem Laboratories Limited (NSE:ALKEM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alkem Laboratories

How Much Debt Does Alkem Laboratories Carry?

As you can see below, Alkem Laboratories had ₹14.2b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹42.7b in cash, leading to a ₹28.5b net cash position.

How Healthy Is Alkem Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Alkem Laboratories had liabilities of ₹39.9b falling due within a year, and liabilities of ₹8.66b due beyond that. Offsetting this, it had ₹42.7b in cash and ₹24.6b in receivables that were due within 12 months. So it can boast ₹18.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Alkem Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Alkem Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Alkem Laboratories has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alkem Laboratories can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alkem Laboratories 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. During the last three years, Alkem Laboratories produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. 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 Alkem Laboratories has net cash of ₹28.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 44% year-on-year EBIT growth. So is Alkem Laboratories's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Alkem Laboratories , and understanding them should be part of your investment process.

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.