We Think Alkem Laboratories (NSE:ALKEM) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Alkem Laboratories Limited (NSE:ALKEM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Alkem Laboratories

What Is Alkem Laboratories's Debt?

As you can see below, at the end of September 2022, Alkem Laboratories had ₹19.3b of debt, up from ₹18.1b a year ago. Click the image for more detail. But on the other hand it also has ₹27.6b in cash, leading to a ₹8.28b net cash position.

How Healthy Is Alkem Laboratories' Balance Sheet?

The latest balance sheet data shows that Alkem Laboratories had liabilities of ₹39.7b due within a year, and liabilities of ₹5.27b falling due after that. Offsetting this, it had ₹27.6b in cash and ₹21.7b in receivables that were due within 12 months. So it actually has ₹4.27b more liquid assets than total liabilities.

This state of affairs indicates that Alkem Laboratories' 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 ₹377.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Alkem Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Alkem Laboratories's load is not too heavy, because its EBIT was down 26% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 52% 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 ₹8.28b, as well as more liquid assets than liabilities. So we are not troubled with Alkem Laboratories's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Alkem Laboratories that you should be aware of before investing here.

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.