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. We note that Public Joint Stock Company ALROSA (MCX:ALRS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ALROSA's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 ALROSA had ₽167.8b of debt, an increase on ₽156.6b, over one year. However, it does have ₽194.5b in cash offsetting this, leading to net cash of ₽26.7b.
A Look At ALROSA's Liabilities
We can see from the most recent balance sheet that ALROSA had liabilities of ₽123.2b falling due within a year, and liabilities of ₽143.8b due beyond that. On the other hand, it had cash of ₽194.5b and ₽10.6b worth of receivables due within a year. So its liabilities total ₽61.8b more than the combination of its cash and short-term receivables.
Since publicly traded ALROSA shares are worth a very impressive total of ₽942.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ALROSA also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the bad news is that ALROSA has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ALROSA 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. While ALROSA 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. Over the last three years, ALROSA recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that ALROSA has ₽26.7b in net cash. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in ₽110b. So we are not troubled with ALROSA'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. For instance, we've identified 2 warning signs for ALROSA (1 shouldn't be ignored) you should be aware of.
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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