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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 note that Alembic Pharmaceuticals Limited (NSE:APLLTD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Alembic Pharmaceuticals
How Much Debt Does Alembic Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Alembic Pharmaceuticals had ₹11.3b of debt, an increase on ₹7.08b, over one year. On the flip side, it has ₹1.99b in cash leading to net debt of about ₹9.29b.
A Look At Alembic Pharmaceuticals's Liabilities
Zooming in on the latest balance sheet data, we can see that Alembic Pharmaceuticals had liabilities of ₹14.9b due within 12 months and liabilities of ₹5.70b due beyond that. Offsetting these obligations, it had cash of ₹1.99b as well as receivables valued at ₹4.89b due within 12 months. So it has liabilities totalling ₹13.7b more than its cash and near-term receivables, combined.
Since publicly traded Alembic Pharmaceuticals shares are worth a total of ₹93.1b, 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.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.