RWS Holdings (LON:RWS) Has A Rock Solid Balance Sheet

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. As with many other companies RWS Holdings plc (LON:RWS) 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for RWS Holdings

What Is RWS Holdings's Net Debt?

As you can see below, RWS Holdings had UK£29.3m of debt at September 2022, down from UK£47.2m a year prior. But it also has UK£101.2m in cash to offset that, meaning it has UK£71.9m net cash.

How Strong Is RWS Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RWS Holdings had liabilities of UK£203.6m due within 12 months and liabilities of UK£131.0m due beyond that. On the other hand, it had cash of UK£101.2m and UK£211.6m worth of receivables due within a year. So it has liabilities totalling UK£21.8m more than its cash and near-term receivables, combined.

This state of affairs indicates that RWS Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£1.39b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, RWS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that RWS Holdings has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. 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 RWS Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, RWS Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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£71.9m. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in UK£98m. So we don't think RWS Holdings's use of debt is risky. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.