Is Alpa Laboratories (NSE:ALPA) A Risky Investment?

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. We note that Alpa Laboratories Limited (NSE:ALPA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Alpa Laboratories

What Is Alpa Laboratories's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Alpa Laboratories had ₹139.1m of debt, an increase on ₹55.4m, over one year. But it also has ₹702.0m in cash to offset that, meaning it has ₹562.9m net cash.

How Strong Is Alpa Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Alpa Laboratories had liabilities of ₹303.7m falling due within a year, and liabilities of ₹124.1m due beyond that. Offsetting this, it had ₹702.0m in cash and ₹412.5m in receivables that were due within 12 months. So it can boast ₹686.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Alpa Laboratories' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Alpa Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Alpa Laboratories saw its EBIT drop by 3.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Alpa Laboratories 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. While Alpa 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, Alpa Laboratories burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alpa Laboratories has ₹562.9m in net cash and a decent-looking balance sheet. So we are not troubled with Alpa Laboratories's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Alpa Laboratories (of which 1 makes us a bit uncomfortable!) 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.