Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Raketech Group Holding PLC (STO:RAKE) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Raketech Group Holding
What Is Raketech Group Holding's Net Debt?
As you can see below, Raketech Group Holding had €2.86m of debt at June 2019, down from €37.4m a year prior. However, it does have €3.43m in cash offsetting this, leading to net cash of €569.0k.
A Look At Raketech Group Holding's Liabilities
Zooming in on the latest balance sheet data, we can see that Raketech Group Holding had liabilities of €5.10m due within 12 months and liabilities of €7.16m due beyond that. On the other hand, it had cash of €3.43m and €4.30m worth of receivables due within a year. So it has liabilities totalling €4.52m more than its cash and near-term receivables, combined.
Given Raketech Group Holding has a market capitalization of €45.3m, 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, Raketech Group Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
We note that Raketech Group Holding grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Raketech Group Holding 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. Over the last three years, Raketech Group Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
We could understand if investors are concerned about Raketech Group Holding's liabilities, but we can be reassured by the fact it has has net cash of €569k. And it impressed us with its EBIT growth of 26% over the last year. So we are not troubled with Raketech Group Holding's debt use. We'd be motivated to research the stock further if we found out that Raketech Group Holding insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.