Alkemy (BIT:ALK) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Alkemy S.p.A. (BIT:ALK) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alkemy

What Is Alkemy's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Alkemy had debt of €17.2m, up from €11.5m in one year. However, it does have €21.1m in cash offsetting this, leading to net cash of €3.89m.

How Strong Is Alkemy's Balance Sheet?

According to the last reported balance sheet, Alkemy had liabilities of €33.4m due within 12 months, and liabilities of €22.1m due beyond 12 months. Offsetting these obligations, it had cash of €21.1m as well as receivables valued at €24.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.2m.

While this might seem like a lot, it is not so bad since Alkemy has a market capitalization of €36.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Alkemy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Alkemy's EBIT launched higher than Elon Musk, gaining a whopping 103% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alkemy 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, a company can only pay off debt with cold hard cash, not accounting profits. While Alkemy 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, Alkemy produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Alkemy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €3.89m. And we liked the look of last year's 103% year-on-year EBIT growth. So we are not troubled with Alkemy's debt use. 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. Be aware that Alkemy is showing 3 warning signs in our investment analysis , you should know about...

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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