Is Robert Walters (LON:RWA) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Robert Walters plc (LON:RWA) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Robert Walters

What Is Robert Walters's Debt?

The image below, which you can click on for greater detail, shows that Robert Walters had debt of UK£9.40m at the end of June 2021, a reduction from UK£14.4m over a year. But on the other hand it also has UK£132.2m in cash, leading to a UK£122.8m net cash position.

How Healthy Is Robert Walters' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Robert Walters had liabilities of UK£172.6m due within 12 months and liabilities of UK£51.1m due beyond that. On the other hand, it had cash of UK£132.2m and UK£164.7m worth of receivables due within a year. So it can boast UK£73.2m more liquid assets than total liabilities.

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

Fortunately, Robert Walters grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. 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 Robert Walters'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Robert Walters 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. Happily for any shareholders, Robert Walters 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

While we empathize with investors who find debt concerning, you should keep in mind that Robert Walters has net cash of UK£122.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£42m, being 163% of its EBIT. So is Robert Walters's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Robert Walters has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.