These 4 Measures Indicate That Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt (BUSE:RICHTER) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt. (BUSE:RICHTER) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

The image below, which you can click on for greater detail, shows that at September 2022 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had debt of Ft91.3b, up from Ft28.7b in one year. But on the other hand it also has Ft97.9b in cash, leading to a Ft6.59b net cash position.

How Strong 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 Ft171.0b falling due within a year, and liabilities of Ft107.3b due beyond that. Offsetting these obligations, it had cash of Ft97.9b as well as receivables valued at Ft264.5b due within 12 months. So it can boast 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. 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!

On top of that, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's ability to maintain a healthy balance sheet going forward. 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 35% 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 Ft6.59b, as well as more liquid assets than liabilities. And we liked the look of last year's 44% 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. Over time, share prices tend to follow earnings per share, so if you're interested in Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt, you may well want to click here to check an interactive graph of its earnings per share history.

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.