Laboratorios Farmaceuticos Rovi (BME:ROVI) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Laboratorios Farmaceuticos Rovi, S.A. (BME:ROVI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Laboratorios Farmaceuticos Rovi

How Much Debt Does Laboratorios Farmaceuticos Rovi Carry?

The image below, which you can click on for greater detail, shows that Laboratorios Farmaceuticos Rovi had debt of €48.8m at the end of September 2023, a reduction from €55.0m over a year. But it also has €56.4m in cash to offset that, meaning it has €7.58m net cash.

How Healthy Is Laboratorios Farmaceuticos Rovi's Balance Sheet?

The latest balance sheet data shows that Laboratorios Farmaceuticos Rovi had liabilities of €220.8m due within a year, and liabilities of €55.3m falling due after that. On the other hand, it had cash of €56.4m and €139.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €80.6m.

Of course, Laboratorios Farmaceuticos Rovi has a market capitalization of €3.11b, 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. Despite its noteworthy liabilities, Laboratorios Farmaceuticos Rovi boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Laboratorios Farmaceuticos Rovi grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Laboratorios Farmaceuticos Rovi's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Laboratorios Farmaceuticos Rovi 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. Over the most recent three years, Laboratorios Farmaceuticos Rovi recorded free cash flow worth 57% 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

We could understand if investors are concerned about Laboratorios Farmaceuticos Rovi's liabilities, but we can be reassured by the fact it has has net cash of €7.58m. And it impressed us with its EBIT growth of 17% over the last year. So we don't think Laboratorios Farmaceuticos Rovi'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. For example, we've discovered 1 warning sign for Laboratorios Farmaceuticos Rovi that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.