Stock Analysis

These 4 Measures Indicate That Alembic Pharmaceuticals (NSE:APLLTD) Is Using Debt Reasonably Well

NSEI:APLLTD
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Alembic Pharmaceuticals Limited (NSE:APLLTD) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alembic Pharmaceuticals

How Much Debt Does Alembic Pharmaceuticals Carry?

As you can see below, Alembic Pharmaceuticals had ₹5.84b of debt at March 2021, down from ₹18.3b a year prior. However, it does have ₹2.85b in cash offsetting this, leading to net debt of about ₹2.99b.

debt-equity-history-analysis
NSEI:APLLTD Debt to Equity History September 24th 2021

How Healthy Is Alembic Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Alembic Pharmaceuticals had liabilities of ₹12.8b due within a year, and liabilities of ₹3.61b falling due after that. Offsetting this, it had ₹2.85b in cash and ₹3.65b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹9.92b.

Since publicly traded Alembic Pharmaceuticals shares are worth a total of ₹161.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Alembic Pharmaceuticals has a low net debt to EBITDA ratio of only 0.23. And its EBIT easily covers its interest expense, being 113 times the size. So we're pretty relaxed about its super-conservative use of debt. But the bad news is that Alembic Pharmaceuticals has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alembic Pharmaceuticals 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Alembic Pharmaceuticals recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Alembic Pharmaceuticals's interest cover was a real positive on this analysis, as was its net debt to EBITDA. But truth be told its EBIT growth rate had us nibbling our nails. Considering this range of data points, we think Alembic Pharmaceuticals is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. We've identified 1 warning sign with Alembic Pharmaceuticals , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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