Alankit (NSE: ALANKIT) has a somewhat strained record

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that Alankit Limited (NSE: ALANKIT) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest analysis for Alankit

What is Alankit’s net debt?

The image below, which you can click for more details, shows that in September 2021, Alankit had a debt of 194.4 million yen, up from 142.3 million yen in a year. But on the other hand, it also has 613.0 million yen in cash, which leads to a net cash position of 418.7 million yen.

How healthy is Alankit’s track record?

According to the latest published balance sheet, Alankit had liabilities of 996.4 million yen due within 12 months and liabilities of 309.3 million yen due beyond 12 months. In return, he had 613.0 million yen in cash and 433.4 million yen in receivables due within 12 months. Thus, its liabilities exceed by 259.4 M the sum of its cash and its receivables (short term).

Of course, Alankit has a market cap of ₹ 2.28b, so these liabilities are probably manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While he has some liabilities to note, Alankit also has more cash than debt, so we’re pretty confident that he can handle his debt safely.

In fact, Alankit’s saving grace lies in its low level of debt, as its EBIT has fallen 37% in the past twelve months. When it comes to paying down debt, lower income is no more helpful to your health than sugary sodas. There is no doubt that we learn the most about debt from the balance sheet. But it is Alankit’s profits that will influence the way the balance sheet looks in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Alankit may have net cash on the balance sheet, but it is always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Considering the past three years, Alankit has actually experienced an overall cash outflow. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.

In summary

Although Alankit’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has a net cash position of 418.7 million euros. So while we see areas for improvement, we are not overly worried about Alankit’s record. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, Alankit has 3 warning signs (and 1 that shouldn’t be ignored) we think you should be aware of.

At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.