Does Laboratorios Farmaceuticos Rovi (BME:ROVI) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Laboratorios Farmaceuticos Rovi, S.A. (BME:ROVI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Laboratorios Farmaceuticos Rovi

What Is Laboratorios Farmaceuticos Rovi's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Laboratorios Farmaceuticos Rovi had debt of €69.3m, up from €55.5m in one year. But on the other hand it also has €141.5m in cash, leading to a €72.2m net cash position.

How Strong Is Laboratorios Farmaceuticos Rovi's Balance Sheet?

According to the last reported balance sheet, Laboratorios Farmaceuticos Rovi had liabilities of €255.4m due within 12 months, and liabilities of €61.0m due beyond 12 months. Offsetting these obligations, it had cash of €141.5m as well as receivables valued at €161.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €13.6m.

Having regard to Laboratorios Farmaceuticos Rovi's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €2.34b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Laboratorios Farmaceuticos Rovi boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Laboratorios Farmaceuticos Rovi grew its EBIT by 12% last year, making its debt load easier to handle. 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 Laboratorios Farmaceuticos Rovi can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Laboratorios Farmaceuticos Rovi 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 most recent three years, Laboratorios Farmaceuticos Rovi recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Laboratorios Farmaceuticos Rovi has €72.2m in net cash. On top of that, it increased its EBIT by 12% in the last twelve months. So is Laboratorios Farmaceuticos Rovi's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Laboratorios Farmaceuticos Rovi (including 1 which shouldn't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.