These 4 Measures Indicate That Recticel (EBR:RECT) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Recticel SA/NV (EBR:RECT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 Recticel

What Is Recticel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Recticel had €11.3m of debt in December 2023, down from €271.6m, one year before. However, its balance sheet shows it holds €191.4m in cash, so it actually has €180.1m net cash.

How Healthy Is Recticel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Recticel had liabilities of €131.3m due within 12 months and liabilities of €90.7m due beyond that. Offsetting these obligations, it had cash of €191.4m as well as receivables valued at €99.0m due within 12 months. So it actually has €68.4m more liquid assets than total liabilities.

This surplus suggests that Recticel has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Recticel boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Recticel's EBIT was down 61% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Recticel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Recticel 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. Over the last three years, Recticel actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Recticel has €180.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in €26m. So we don't have any problem with Recticel's use of debt. 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 Recticel you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.