Here's Why Redcare Pharmacy (ETR:RDC) Can Afford Some Debt

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.' 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. As with many other companies Redcare Pharmacy NV (ETR:RDC) makes use of debt. But is this debt a concern to shareholders?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Redcare Pharmacy's Net Debt?

The chart below, which you can click on for greater detail, shows that Redcare Pharmacy had €246.8m in debt in March 2025; about the same as the year before. However, because it has a cash reserve of €184.8m, its net debt is less, at about €62.0m.

How Strong Is Redcare Pharmacy's Balance Sheet?

The latest balance sheet data shows that Redcare Pharmacy had liabilities of €286.1m due within a year, and liabilities of €241.9m falling due after that. On the other hand, it had cash of €184.8m and €116.2m worth of receivables due within a year. So its liabilities total €227.0m more than the combination of its cash and short-term receivables.

Given Redcare Pharmacy has a market capitalization of €1.85b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Redcare Pharmacy'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.

See our latest analysis for Redcare Pharmacy

In the last year Redcare Pharmacy wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to €2.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Redcare Pharmacy's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at €38m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €15m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Redcare Pharmacy I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.