We Think Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt (BUSE:RICHTER) Can Manage Its Debt With Ease

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.' 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. We note that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt. (BUSE:RICHTER) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

As you can see below, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt had Ft67.2b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds Ft136.6b in cash, so it actually has Ft69.4b net cash.

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 Ft175.2b falling due within a year, and liabilities of Ft123.9b due beyond that. On the other hand, it had cash of Ft136.6b and Ft248.7b worth of receivables due within a year. So it can boast Ft86.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt could probably pay off its debt with ease, as its balance sheet is far from stretched. 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!

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

Also positive, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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. During the last three years, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has Ft69.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 20% over the last year. So we don't think Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt that you should be aware of before investing here.

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.