Warren Buffett famously said, '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. Importantly, Raketech Group Holding PLC (STO:RAKE) does carry 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Raketech Group Holding Carry?
As you can see below, Raketech Group Holding had €1.69m of debt at December 2020, down from €3.35m a year prior. But it also has €4.97m in cash to offset that, meaning it has €3.27m net cash.
How Healthy Is Raketech Group Holding's Balance Sheet?
According to the last reported balance sheet, Raketech Group Holding had liabilities of €10.3m due within 12 months, and liabilities of €10.2m due beyond 12 months. Offsetting this, it had €4.97m in cash and €4.92m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.6m.
Given Raketech Group Holding has a market capitalization of €69.6m, 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. While it does have liabilities worth noting, Raketech Group Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that Raketech Group Holding has increased its EBIT by 3.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Raketech Group Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Raketech Group Holding 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, Raketech Group Holding created free cash flow amounting to 2.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Although Raketech Group Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €3.27m. And it also grew its EBIT by 3.8% over the last year. So we are not troubled with Raketech Group Holding's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Raketech Group Holding you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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