Warren Buffett famously said, '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. Importantly, Robertet SA (EPA:RBT) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Robertet's Debt?
The image below, which you can click on for greater detail, shows that at June 2022 Robertet had debt of €114.0m, up from €84.7m in one year. However, it does have €127.8m in cash offsetting this, leading to net cash of €13.7m.
How Healthy Is Robertet's Balance Sheet?
According to the last reported balance sheet, Robertet had liabilities of €144.9m due within 12 months, and liabilities of €109.1m due beyond 12 months. Offsetting these obligations, it had cash of €127.8m as well as receivables valued at €180.0m due within 12 months. So it actually has €53.8m 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.
In addition to that, we're happy to report that Robertet has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 Robertet 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Robertet 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, Robertet recorded free cash flow worth 64% 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.
While it is always sensible to investigate a company's debt, in this case Robertet has €13.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't think Robertet's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Robertet, you may well want to click here to check an interactive graph of its earnings per share history.
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.