Warren Buffett’s quote, “Volatility is far from synonymous with risk,” highlights the importance of considering debt when assessing a company’s risk. Alkem Laboratories Limited (NSE:ALKEM) carries debt, but the question remains whether this debt makes the company risky. To determine this, it’s essential to consider the company’s cash and debt together. As of March 2025, Alkem Laboratories had ₹13.8b in debt, which is offset by ₹41.0b in cash, resulting in ₹27.2b in net cash.
The company’s balance sheet shows that it has ₹39.6b in liabilities due within a year and ₹12.9b due beyond that. However, it also has ₹41.0b in cash and ₹25.9b in receivables due within a year, resulting in ₹14.4b more liquid assets than total liabilities. This short-term liquidity indicates that Alkem Laboratories could easily pay off its debt, and its balance sheet is not stretched. The company’s net cash position and ability to convert earnings before interest and tax (EBIT) to free cash flow, which has been around 75% over the last three years, put it in a good position to manage its debt.
Alkem Laboratories’ debt does not appear to be a significant risk, given its net cash position and decent-looking balance sheet. The company’s ability to generate free cash flow and its growth in EBIT by 4.4% in the last year also make its debt load more manageable. While it’s always important to investigate a company’s debt, Alkem Laboratories’ situation does not seem to pose a significant risk. However, it’s essential to consider other factors, such as the company’s overall financial health and potential risks that may not be immediately apparent from the balance sheet.
In conclusion, Alkem Laboratories’ debt is not a significant concern, given its net cash position, ability to generate free cash flow, and decent-looking balance sheet. The company’s growth in EBIT and its ability to convert earnings to free cash flow also contribute to its relatively low-risk debt profile. However, it’s crucial to continue monitoring the company’s financial health and potential risks to ensure that its debt remains manageable.