Rockwool (CPH:ROCK B) Could Easily Take On More Debt

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.' 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. Importantly, Rockwool A/S (CPH:ROCK B) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Rockwool Carry?

The chart below, which you can click on for greater detail, shows that Rockwool had €39.0m in debt in December 2024; about the same as the year before. However, it does have €403.0m in cash offsetting this, leading to net cash of €364.0m.

How Strong Is Rockwool's Balance Sheet?

According to the last reported balance sheet, Rockwool had liabilities of €597.0m due within 12 months, and liabilities of €205.0m due beyond 12 months. On the other hand, it had cash of €403.0m and €426.0m worth of receivables due within a year. So it actually has €27.0m more liquid assets than total liabilities.

Having regard to Rockwool's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €8.09b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Rockwool boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Rockwool

Another good sign is that Rockwool has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rockwool 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Rockwool 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, Rockwool produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rockwool has €364.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't think Rockwool's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Rockwool (of which 1 can't be ignored!) you should know about.

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.