These 4 Measures Indicate That RPA Holdings (TSE:6572) Is Using Debt Safely

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. Importantly, RPA Holdings, Inc. (TSE:6572) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for RPA Holdings

What Is RPA Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that RPA Holdings had JP¥3.67b of debt in November 2023, down from JP¥3.89b, one year before. But it also has JP¥11.5b in cash to offset that, meaning it has JP¥7.85b net cash.

A Look At RPA Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that RPA Holdings had liabilities of JP¥5.26b due within 12 months and liabilities of JP¥1.53b due beyond that. On the other hand, it had cash of JP¥11.5b and JP¥2.03b worth of receivables due within a year. So it can boast JP¥6.76b more liquid assets than total liabilities.

This luscious liquidity implies that RPA Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that RPA Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, RPA Holdings grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RPA Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While RPA Holdings 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. During the last three years, RPA Holdings generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case RPA Holdings has JP¥7.85b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥646m, being 94% of its EBIT. The bottom line is that we do not find RPA Holdings's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for RPA Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.