We Think Laboratorios Farmaceuticos Rovi (BME:ROVI) Can Stay On Top Of Its 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.' 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. We can see that Laboratorios Farmaceuticos Rovi, S.A. (BME:ROVI) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Laboratorios Farmaceuticos Rovi

How Much Debt Does Laboratorios Farmaceuticos Rovi Carry?

As you can see below, Laboratorios Farmaceuticos Rovi had €55.8m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €126.8m in cash, leading to a €71.1m net cash position.

A Look At Laboratorios Farmaceuticos Rovi's Liabilities

The latest balance sheet data shows that Laboratorios Farmaceuticos Rovi had liabilities of €167.4m due within a year, and liabilities of €73.0m falling due after that. On the other hand, it had cash of €126.8m and €110.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Laboratorios Farmaceuticos Rovi's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €3.30b company is struggling for cash, we still think it's worth monitoring its 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!

On top of that, Laboratorios Farmaceuticos Rovi grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. In the last three years, Laboratorios Farmaceuticos Rovi created free cash flow amounting to 11% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

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 €71.1m. And we liked the look of last year's 79% year-on-year EBIT growth. So we don't think Laboratorios Farmaceuticos Rovi's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Laboratorios Farmaceuticos Rovi, you may well want to click here to check an interactive graph of its earnings per share history.

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.
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