Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft28.7b of debt, an increase on none, over one year. However, it does have Ft80.8b in cash offsetting this, leading to net cash of Ft52.1b.
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 Ft148.2b due within a year, and liabilities of Ft94.2b falling due after that. Offsetting these obligations, it had cash of Ft80.8b as well as receivables valued at Ft180.5b due within 12 months. So it actually has 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 it's very unlikely that the Ft1.46t 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.
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 weak cash conversion makes it more difficult to handle indebtedness.
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 we liked the look of last year's 17% year-on-year EBIT growth. 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. Case in point: We've spotted 1 warning sign for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.