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 more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Net Debt?
As you can see below, at the end of September 2021, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft28.7b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has Ft80.8b in cash, leading to a Ft52.1b net cash position.
A Look At Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Liabilities
According to the last reported balance sheet, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had liabilities of Ft148.2b due within 12 months, and liabilities of Ft94.2b due beyond 12 months. Offsetting these obligations, it had cash of Ft80.8b as well as receivables valued at Ft180.5b due within 12 months. So it can boast Ft18.9b more liquid assets than total liabilities.
Having regard to Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the Ft1.60t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
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 Ft52.1b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt , and understanding them should be part of your investment process.
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.
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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