Does Alkem Laboratories (NSE:ALKEM) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Alkem Laboratories Limited (NSE:ALKEM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Alkem Laboratories's Debt?

As you can see below, at the end of September 2025, Alkem Laboratories had ₹19.6b of debt, up from ₹12.4b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹51.5b in cash, so it actually has ₹31.9b net cash.

How Healthy Is Alkem Laboratories' Balance Sheet?

According to the last reported balance sheet, Alkem Laboratories had liabilities of ₹48.8b due within 12 months, and liabilities of ₹16.0b due beyond 12 months. Offsetting this, it had ₹51.5b in cash and ₹31.0b in receivables that were due within 12 months. So it can boast ₹17.8b more liquid assets than total liabilities.

This short term liquidity is a sign that Alkem Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Alkem Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Alkem Laboratories

And we also note warmly that Alkem Laboratories grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alkem Laboratories can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Alkem Laboratories may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Alkem Laboratories produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alkem Laboratories has ₹31.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹10b, being 68% of its EBIT. So we don't think Alkem Laboratories's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Alkem Laboratories you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.