David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt. (BUSE:RICHTER) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
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 June 2021 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft10.0b of debt, an increase on none, over one year. However, its balance sheet shows it holds Ft51.8b in cash, so it actually has Ft41.8b net cash.
How Healthy Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Balance Sheet?
We can see from the most recent balance sheet that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had liabilities of Ft117.1b falling due within a year, and liabilities of Ft96.7b due beyond that. Offsetting these obligations, it had cash of Ft51.8b as well as receivables valued at Ft161.8b due within 12 months. So these liquid assets roughly match the 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 Ft1.63t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt also has more cash than debt, so we're pretty confident 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 36%, 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. 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 created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has Ft41.8b in net cash. And it impressed us with its EBIT growth of 36% over the last year. So is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's earnings per share history for free.
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.
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