These 4 Measures Indicate That Robert Walters (LON:RWA) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Robert Walters plc (LON:RWA) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 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£15.8m at the end of December 2023, a reduction from UK£26.1m over a year. But it also has UK£95.7m in cash to offset that, meaning it has UK£79.9m net cash.

How Healthy Is Robert Walters' Balance Sheet?

The latest balance sheet data shows that Robert Walters had liabilities of UK£187.3m due within a year, and liabilities of UK£63.5m falling due after that. Offsetting these obligations, it had cash of UK£95.7m as well as receivables valued at UK£179.8m due within 12 months. So it actually has UK£24.7m more liquid assets than total liabilities.

This surplus suggests that Robert Walters has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Robert Walters has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Robert Walters's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Robert Walters 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 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. Over the most recent three years, Robert Walters recorded free cash flow worth 52% 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Robert Walters has net cash of UK£79.9m, as well as more liquid assets than liabilities. So we don't have any problem with Robert Walters's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Robert Walters that you should be aware of before investing here.

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.