Does Richelieu Hardware (TSE:RCH) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Richelieu Hardware Ltd. (TSE:RCH) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Richelieu Hardware

What Is Richelieu Hardware's Net Debt?

As you can see below, Richelieu Hardware had CA$2.65m of debt at May 2021, down from CA$11.4m a year prior. However, it does have CA$89.6m in cash offsetting this, leading to net cash of CA$86.9m.

A Look At Richelieu Hardware's Liabilities

According to the last reported balance sheet, Richelieu Hardware had liabilities of CA$151.9m due within 12 months, and liabilities of CA$67.7m due beyond 12 months. Offsetting this, it had CA$89.6m in cash and CA$175.6m in receivables that were due within 12 months. So it actually has CA$45.5m more liquid assets than total liabilities.

This state of affairs indicates that Richelieu Hardware's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$2.47b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Richelieu Hardware boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Richelieu Hardware grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Richelieu Hardware'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Richelieu Hardware 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, Richelieu Hardware generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Richelieu Hardware has net cash of CA$86.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in CA$129m. So we don't think Richelieu Hardware's use of debt is risky. Another factor that would give us confidence in Richelieu Hardware would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.

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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.
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