Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt (BUSE:RICHTER) Using Too Much Debt?

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. Importantly, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt. (BUSE:RICHTER) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt

How Much Debt Does Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft91.3b of debt, an increase on Ft28.7b, over one year. However, its balance sheet shows it holds Ft97.9b in cash, so it actually has Ft6.59b net cash.

How Healthy Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had liabilities of Ft171.0b due within 12 months and liabilities of Ft107.3b due beyond that. On the other hand, it had cash of Ft97.9b and Ft264.5b worth of receivables due within a year. So it actually has Ft84.1b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. 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 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt can strengthen its balance sheet over time. 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. Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt 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. Looking at the most recent three years, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has net cash of Ft6.59b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 44% over the last year. So is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's dividend history, without delay!

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.