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, Roche Bobois S.A. (EPA:RBO) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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, 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Roche Bobois Carry?
As you can see below, at the end of December 2020, Roche Bobois had €48.4m of debt, up from €20.0m a year ago. Click the image for more detail. But it also has €73.3m in cash to offset that, meaning it has €25.0m net cash.
How Strong Is Roche Bobois' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Roche Bobois had liabilities of €172.3m due within 12 months and liabilities of €117.4m due beyond that. On the other hand, it had cash of €73.3m and €20.7m worth of receivables due within a year. So it has liabilities totalling €195.6m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of €212.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Roche Bobois also has more cash than debt, so we're pretty confident it can manage its debt safely.
Sadly, Roche Bobois's EBIT actually dropped 4.7% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. 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 Roche Bobois 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. Roche Bobois 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 last three years, Roche Bobois actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While Roche Bobois does have more liabilities than liquid assets, it also has net cash of €25.0m. And it impressed us with free cash flow of €54m, being 222% of its EBIT. So we don't have any problem with Roche Bobois's use of debt. 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. For example, we've discovered 2 warning signs for Roche Bobois that you should be aware of before investing here.
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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