Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt (BUSE:RICHTER) A Risky Investment?

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.' 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. We can see that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt. (BUSE:RICHTER) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt

What Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Net Debt?

The chart below, which you can click on for greater detail, shows that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft69.3b in debt in March 2023; about the same as the year before. However, it does have Ft119.3b in cash offsetting this, leading to net cash of Ft50.0b.

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

The latest balance sheet data shows that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had liabilities of Ft171.6b due within a year, and liabilities of Ft99.6b falling due after that. On the other hand, it had cash of Ft119.3b and Ft180.4b worth of receivables due within a year. So it can boast Ft28.4b more liquid assets than total liabilities.

This state of affairs indicates that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the Ft1.57t company is short on cash, but still worth keeping an eye on the balance sheet. 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 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. While Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt 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. In the last three years, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's free cash flow amounted to 30% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 Ft50.0b, as well as more liquid assets than liabilities. And we liked the look of last year's 41% year-on-year EBIT growth. So is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt'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, we've discovered 1 warning sign for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.