Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Public limited company ALROSA (MCX: ALRS) uses debt in its business. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash flow and debt together.
Discover our latest analysis for ALROSA
What is ALROSA’s net debt?
The image below, which you can click for more details, shows that ALROSA had a debt of 120.2 billion yen at the end of June 2021, a reduction from 210.3 billion yen on a year. However, it has 154.7 billion yen in cash to compensate for this, which leads to a net cash position of 34.5 billion yen.
How strong is ALROSA’s balance sheet?
We can see from the most recent balance sheet that ALROSA had liabilities of 127.4 billion yen due within one year and liabilities of 132.2 billion yen beyond. On the other hand, he had 154.7 billion yen in cash and 15.9 billion yen in receivables due within a year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 89.2 b.
Considering that ALROSA has a massive market cap of 1.02, it’s hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While she has some liabilities to note, ALROSA also has more cash than debt, so we’re pretty confident that she can handle her debt safely.
Even more impressive, ALROSA increased its EBIT by 102% year over year. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine ALROSA’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although ALROSA has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building ( or erodes) that cash balance. . Over the past three years, ALROSA has generated free cash flow of 85% of its very robust EBIT, more than we expected. This positions it well to repay debt if it is desirable.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that ALROSA has 34.5 billion yen in net cash. And it impressed us with free cash flow of 152 billion euros, or 85% of its EBIT. So, is ALROSA’s debt a risk? It does not seem to us. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for ALROSA (1 cannot be ignored!) Which you should be aware of before investing here.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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 shares 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 material. Simply Wall St has no position in the mentioned stocks.
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