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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt

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

The chart below, which you can click on for greater detail, shows that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft92.1b in debt in September 2023; about the same as the year before. But it also has Ft106.0b in cash to offset that, meaning it has Ft13.9b net cash.

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

According to the last reported balance sheet, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had liabilities of Ft158.3b due within 12 months, and liabilities of Ft104.2b due beyond 12 months. Offsetting this, it had Ft106.0b in cash and Ft216.1b in receivables that were due within 12 months. So it actually has Ft59.7b 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.

On the other hand, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 27% of its EBIT, which is weaker 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 Ft13.9b, as well as more liquid assets than liabilities. So we are not troubled with Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.