RWS Holdings (LON:RWS) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that RWS Holdings plc (LON:RWS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for RWS Holdings

How Much Debt Does RWS Holdings Carry?

The image below, which you can click on for greater detail, shows that RWS Holdings had debt of UK£18.5m at the end of March 2023, a reduction from UK£42.4m over a year. But it also has UK£76.3m in cash to offset that, meaning it has UK£57.8m net cash.

How Healthy Is RWS Holdings' Balance Sheet?

The latest balance sheet data shows that RWS Holdings had liabilities of UK£186.0m due within a year, and liabilities of UK£111.5m falling due after that. On the other hand, it had cash of UK£76.3m and UK£199.3m worth of receivables due within a year. So its liabilities total UK£21.9m more than the combination of its cash and short-term receivables.

Given RWS Holdings has a market capitalization of UK£982.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, RWS Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, RWS Holdings grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if RWS Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. RWS Holdings 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. Happily for any shareholders, RWS Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about RWS Holdings's liabilities, but we can be reassured by the fact it has has net cash of UK£57.8m. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in UK£88m. So is RWS Holdings's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in RWS Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.