Richelieu Hardware (TSE:RCH) Seems To Use Debt Quite Sensibly

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.' 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 should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

How Much Debt Does Richelieu Hardware Carry?

As you can see below, Richelieu Hardware had CA$43.1m of debt, at August 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$45.6m in cash offsetting this, leading to net cash of CA$2.50m.

A Look At Richelieu Hardware's Liabilities

According to the last reported balance sheet, Richelieu Hardware had liabilities of CA$286.7m due within 12 months, and liabilities of CA$195.9m due beyond 12 months. Offsetting this, it had CA$45.6m in cash and CA$261.1m in receivables that were due within 12 months. So it has liabilities totalling CA$176.0m more than its cash and near-term receivables, combined.

Of course, Richelieu Hardware has a market capitalization of CA$2.05b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Richelieu Hardware boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Richelieu Hardware

On the other hand, Richelieu Hardware saw its EBIT drop by 2.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Richelieu Hardware 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. Over the last three years, Richelieu Hardware recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Richelieu Hardware has CA$2.50m in net cash. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in CA$144m. So we don't think Richelieu Hardware's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Richelieu Hardware's earnings per share history for free.

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.