Does Renishaw (LON:RSW) Have A Healthy 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.' 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. We can see that Renishaw plc (LON:RSW) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Renishaw

How Much Debt Does Renishaw Carry?

The image below, which you can click on for greater detail, shows that Renishaw had debt of UK£3.26m at the end of December 2024, a reduction from UK£4.37m over a year. However, its balance sheet shows it holds UK£233.2m in cash, so it actually has UK£229.9m net cash.

How Strong Is Renishaw's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Renishaw had liabilities of UK£102.7m due within 12 months and liabilities of UK£45.4m due beyond that. Offsetting this, it had UK£233.2m in cash and UK£167.9m in receivables that were due within 12 months. So it can boast UK£252.9m more liquid assets than total liabilities.

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

While Renishaw doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Renishaw 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Renishaw 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. In the last three years, Renishaw's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Renishaw has UK£229.9m in net cash and a decent-looking balance sheet. So we are not troubled with Renishaw's debt use. 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. Case in point: We've spotted 1 warning sign for Renishaw 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.