Redcare Pharmacy (ETR:RDC) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Redcare Pharmacy NV (ETR:RDC) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Redcare Pharmacy

What Is Redcare Pharmacy's Debt?

The image below, which you can click on for greater detail, shows that Redcare Pharmacy had debt of €244.4m at the end of September 2023, a reduction from €274.7m over a year. However, because it has a cash reserve of €233.8m, its net debt is less, at about €10.6m.

How Strong Is Redcare Pharmacy's Balance Sheet?

We can see from the most recent balance sheet that Redcare Pharmacy had liabilities of €223.7m falling due within a year, and liabilities of €243.5m due beyond that. Offsetting these obligations, it had cash of €233.8m as well as receivables valued at €135.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €98.0m.

Since publicly traded Redcare Pharmacy shares are worth a total of €2.71b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Redcare Pharmacy has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 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 37%, to €1.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Redcare Pharmacy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost €8.2m at the EBIT level. 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. Another cause for caution is that is bled €2.2m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Redcare Pharmacy insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.