We Think Alpex Solar (NSE:ALPEXSOLAR) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Alpex Solar Limited (NSE:ALPEXSOLAR) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. 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 Alpex Solar

How Much Debt Does Alpex Solar Carry?

As you can see below, Alpex Solar had ₹330.6m of debt at September 2024, down from ₹357.3m a year prior. But on the other hand it also has ₹431.4m in cash, leading to a ₹100.8m net cash position.

A Look At Alpex Solar's Liabilities

According to the last reported balance sheet, Alpex Solar had liabilities of ₹1.03b due within 12 months, and liabilities of ₹42.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹431.4m as well as receivables valued at ₹944.6m due within 12 months. So it can boast ₹304.6m more liquid assets than total liabilities.

This state of affairs indicates that Alpex Solar's 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 ₹16.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Alpex Solar has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Alpex Solar grew its EBIT by 155% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Alpex Solar's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Alpex Solar 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, Alpex Solar burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alpex Solar has net cash of ₹100.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 155% year-on-year EBIT growth. So we don't have any problem with Alpex Solar's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Alpex Solar (including 1 which is potentially serious) .

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.