Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. 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 can see that Robert Half International Inc. (NYSE:RHI) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Robert Half International Carry?
The image below, which you can click on for greater detail, shows that Robert Half International had debt of US$559.0k at the end of June 2019, a reduction from US$750.0k over a year. However, its balance sheet shows it holds US$269.4m in cash, so it actually has US$268.9m net cash.
A Look At Robert Half International’s Liabilities
The latest balance sheet data shows that Robert Half International had liabilities of US$909.5m due within a year, and liabilities of US$220.7m falling due after that. Offsetting these obligations, it had cash of US$269.4m as well as receivables valued at US$842.3m due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to Robert Half International’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$6.24b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While it does have liabilities worth noting, Robert Half International also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Also good is that Robert Half International grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Robert Half International 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Robert Half International has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Robert Half International generated free cash flow amounting to a very robust 81% of its EBIT, more than we’d expect. That puts it in a very strong position to pay down debt.
We could understand if investors are concerned about Robert Half International’s liabilities, but we can be reassured by the fact it has has net cash of US$268.9m. And it impressed us with free cash flow of US$502m, being 81% of its EBIT. So is Robert Half International’s debt a risk? It doesn’t seem so to us. We’d be very excited to see if Robert Half International insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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 firstname.lastname@example.org. 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.