We Think Renishaw (LON:RSW) Can Manage Its Debt With Ease

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. As with many other companies Renishaw plc (LON:RSW) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Renishaw

What Is Renishaw's Debt?

As you can see below, Renishaw had UK£7.45m of debt at June 2021, down from UK£11.5m a year prior. But on the other hand it also has UK£215.0m in cash, leading to a UK£207.6m net cash position.

A Look At Renishaw's Liabilities

Zooming in on the latest balance sheet data, we can see that Renishaw had liabilities of UK£104.0m due within 12 months and liabilities of UK£49.6m due beyond that. Offsetting these obligations, it had cash of UK£215.0m as well as receivables valued at UK£149.0m due within 12 months. So it can boast UK£210.4m 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. Succinctly put, Renishaw boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Renishaw grew its EBIT by 77% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Renishaw's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, Renishaw produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. 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 Renishaw has net cash of UK£207.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 77% year-on-year EBIT growth. So we don't think Renishaw's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Renishaw, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.

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