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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Alkem Laboratories Limited (NSE:ALKEM) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Alkem Laboratories Carry?

The chart below, which you can click on for greater detail, shows that Alkem Laboratories had ₹13.8b in debt in March 2025; about the same as the year before. But it also has ₹41.0b in cash to offset that, meaning it has ₹27.2b net cash.

A Look At Alkem Laboratories' Liabilities

We can see from the most recent balance sheet that Alkem Laboratories had liabilities of ₹39.6b falling due within a year, and liabilities of ₹12.9b due beyond that. On the other hand, it had cash of ₹41.0b and ₹25.9b worth of receivables due within a year. So it can boast ₹14.4b 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!

View our latest analysis for Alkem Laboratories

Fortunately, Alkem Laboratories grew its EBIT by 4.4% in the last year, making that debt load look even more manageable. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Alkem Laboratories 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. During the last three years, Alkem Laboratories produced sturdy free cash flow equating to 75% 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 it is always sensible to investigate a company's debt, in this case Alkem Laboratories has ₹27.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in ₹12b. 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. 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 Alkem Laboratories you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.