We Think AksharChem (India) (NSE:AKSCHEM) Is Taking Some Risk With Its Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 AksharChem (India) Limited (NSE:AKSCHEM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for AksharChem (India)
How Much Debt Does AksharChem (India) Carry?
The image below, which you can click on for greater detail, shows that at March 2019 AksharChem (India) had debt of ₹115.3m, up from none in one year. However, because it has a cash reserve of ₹22.7m, its net debt is less, at about ₹92.5m.
How Healthy Is AksharChem (India)'s Balance Sheet?
We can see from the most recent balance sheet that AksharChem (India) had liabilities of ₹436.5m falling due within a year, and liabilities of ₹151.6m due beyond that. On the other hand, it had cash of ₹22.7m and ₹411.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹153.5m.
Given AksharChem (India) has a market capitalization of ₹1.63b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
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.
AksharChem (India)'s net debt is only 0.30 times its EBITDA. And its EBIT covers its interest expense a whopping 25.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In fact AksharChem (India)'s saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is AksharChem (India)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, AksharChem (India) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Our View
While AksharChem (India)'s EBIT growth rate has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. When we consider all the factors discussed, it seems to us that AksharChem (India) is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. Over time, share prices tend to follow earnings per share, so if you're interested in AksharChem (India), you may well want to click here to check an interactive graph of its earnings per share history.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
