We Think Raketech Group Holding (STO:RAKE) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Raketech Group Holding PLC (STO:RAKE) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Raketech Group Holding

How Much Debt Does Raketech Group Holding Carry?

As you can see below, Raketech Group Holding had €14.9m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €15.4m in cash, leading to a €494.0k net cash position.

How Strong Is Raketech Group Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Raketech Group Holding had liabilities of €34.6m due within 12 months and liabilities of €38.9m due beyond that. Offsetting these obligations, it had cash of €15.4m as well as receivables valued at €12.1m due within 12 months. So it has liabilities totalling €46.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €58.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Raketech Group Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Raketech Group Holding grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

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 €494.0k. On top of that, it increased its EBIT by 11% in the last twelve months. 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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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.