Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Allkem Limited (ASX:AKE) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Allkem
What Is Allkem's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Allkem had US$333.5m of debt, an increase on US$251.0m, over one year. But on the other hand it also has US$449.8m in cash, leading to a US$116.3m net cash position.
How Strong Is Allkem's Balance Sheet?
According to the last reported balance sheet, Allkem had liabilities of US$132.2m due within 12 months, and liabilities of US$1.15b due beyond 12 months. On the other hand, it had cash of US$449.8m and US$31.8m worth of receivables due within a year. So its liabilities total US$799.2m more than the combination of its cash and short-term receivables.
Of course, Allkem has a market capitalization of US$5.54b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Allkem also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Allkem made a loss at the EBIT level, last year, but improved that to positive EBIT of US$69m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Allkem's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.