We Think Alkem Laboratories (NSE:ALKEM) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Alkem Laboratories Limited (NSE:ALKEM) makes use of debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Alkem Laboratories

How Much Debt Does Alkem Laboratories Carry?

The image below, which you can click on for greater detail, shows that Alkem Laboratories had debt of ₹12.4b at the end of September 2023, a reduction from ₹18.4b over a year. But on the other hand it also has ₹36.1b in cash, leading to a ₹23.7b net cash position.

How Strong Is Alkem Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Alkem Laboratories had liabilities of ₹39.1b falling due within a year, and liabilities of ₹7.89b due beyond that. Offsetting this, it had ₹36.1b in cash and ₹24.6b in receivables that were due within 12 months. So it can boast ₹13.7b 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. Succinctly put, Alkem Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Alkem Laboratories grew its EBIT by 54% 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 it is future earnings, more than anything, that will determine Alkem Laboratories'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. 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 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alkem Laboratories has net cash of ₹23.7b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 54% over the last year. So is Alkem Laboratories's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Alkem Laboratories that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.