RoodMicrotec (AMS:ROOD) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 RoodMicrotec N.V. (AMS:ROOD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for RoodMicrotec

How Much Debt Does RoodMicrotec Carry?

As you can see below, RoodMicrotec had €2.53m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has €3.68m in cash to offset that, meaning it has €1.16m net cash.

How Strong Is RoodMicrotec's Balance Sheet?

According to the last reported balance sheet, RoodMicrotec had liabilities of €2.72m due within 12 months, and liabilities of €6.63m due beyond 12 months. Offsetting these obligations, it had cash of €3.68m as well as receivables valued at €2.57m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.09m.

Given RoodMicrotec has a market capitalization of €18.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, RoodMicrotec boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that RoodMicrotec has boosted its EBIT by 100%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RoodMicrotec will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. RoodMicrotec 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 two years, RoodMicrotec generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While RoodMicrotec does have more liabilities than liquid assets, it also has net cash of €1.16m. And it impressed us with free cash flow of €1.8m, being 87% of its EBIT. So we don't think RoodMicrotec's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for RoodMicrotec you should be aware of.

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.

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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.