Robertet (EPA:RBT) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Robertet SA (EPA:RBT) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Robertet

What Is Robertet's Debt?

The image below, which you can click on for greater detail, shows that Robertet had debt of €74.3m at the end of December 2020, a reduction from €87.1m over a year. But it also has €150.8m in cash to offset that, meaning it has €76.5m net cash.

A Look At Robertet's Liabilities

We can see from the most recent balance sheet that Robertet had liabilities of €109.5m falling due within a year, and liabilities of €83.9m due beyond that. Offsetting this, it had €150.8m in cash and €115.1m in receivables that were due within 12 months. So it can boast €72.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Robertet could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Robertet has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Robertet saw its EBIT decline by 2.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Robertet's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Robertet 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. During the last three years, Robertet produced sturdy free cash flow equating to 79% 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 we empathize with investors who find debt concerning, you should keep in mind that Robertet has net cash of €76.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €86m, being 79% of its EBIT. So we don't think Robertet's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Robertet's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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