Is Redcare Pharmacy (ETR:RDC) Using Too Much Debt?

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 note that Redcare Pharmacy NV (ETR:RDC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Redcare Pharmacy

How Much Debt Does Redcare Pharmacy Carry?

You can click the graphic below for the historical numbers, but it shows that Redcare Pharmacy had €256.7m of debt in June 2023, down from €268.3m, one year before. However, because it has a cash reserve of €250.9m, its net debt is less, at about €5.86m.

How Strong Is Redcare Pharmacy's Balance Sheet?

The latest balance sheet data shows that Redcare Pharmacy had liabilities of €225.8m due within a year, and liabilities of €256.3m falling due after that. Offsetting these obligations, it had cash of €250.9m as well as receivables valued at €123.8m due within 12 months. So it has liabilities totalling €107.4m more than its cash and near-term receivables, combined.

Of course, Redcare Pharmacy has a market capitalization of €1.90b, 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. But either way, Redcare Pharmacy has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 Redcare Pharmacy 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.

In the last year Redcare Pharmacy wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to €1.4b. With any luck the company will be able to grow its way to profitability.

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 €12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €13m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Redcare Pharmacy has 2 warning signs we think you should be aware of.

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.