These 4 Measures Indicate That RoodMicrotec (AMS:ROOD) Is Using Debt Reasonably Well

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.' 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. As with many other companies RoodMicrotec N.V. (AMS:ROOD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for RoodMicrotec

What Is RoodMicrotec's Net Debt?

The chart below, which you can click on for greater detail, shows that RoodMicrotec had €2.47m in debt in December 2021; about the same as the year before. But on the other hand it also has €2.56m in cash, leading to a €88.0k net cash position.

A Look At RoodMicrotec's Liabilities

We can see from the most recent balance sheet that RoodMicrotec had liabilities of €2.09m falling due within a year, and liabilities of €7.32m due beyond that. Offsetting these obligations, it had cash of €2.56m as well as receivables valued at €2.07m due within 12 months. So its liabilities total €4.79m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since RoodMicrotec has a market capitalization of €14.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, RoodMicrotec boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, RoodMicrotec turned things around in the last 12 months, delivering and EBIT of €1.2m. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, RoodMicrotec actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While RoodMicrotec does have more liabilities than liquid assets, it also has net cash of €88.0k. And it impressed us with free cash flow of €1.4m, being 112% of its EBIT. So we are not troubled with RoodMicrotec's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for RoodMicrotec you should know about.

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.