Is Alankit (NSE:ALANKIT) A Risky Investment?

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.' 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. Importantly, Alankit Limited (NSE:ALANKIT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alankit

How Much Debt Does Alankit Carry?

As you can see below, Alankit had ₹130.9m of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹153.5m in cash, so it actually has ₹22.6m net cash.

How Healthy Is Alankit's Balance Sheet?

We can see from the most recent balance sheet that Alankit had liabilities of ₹467.5m falling due within a year, and liabilities of ₹343.7m due beyond that. On the other hand, it had cash of ₹153.5m and ₹390.2m worth of receivables due within a year. So its liabilities total ₹267.4m more than the combination of its cash and short-term receivables.

Since publicly traded Alankit shares are worth a total of ₹2.35b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Alankit boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Alankit grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Alankit 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Alankit may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Alankit actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

Although Alankit's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹22.6m. And it impressed us with its EBIT growth of 16% over the last year. So we are not troubled with Alankit'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. To that end, you should be aware of the 2 warning signs we've spotted with Alankit .

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. 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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