Is Rollins (NYSE:ROL) Using Too Much Debt?

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 note that Rollins, Inc. (NYSE:ROL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rollins

What Is Rollins's Net Debt?

The image below, which you can click on for greater detail, shows that Rollins had debt of US$62.4m at the end of March 2023, a reduction from US$295.8m over a year. However, its balance sheet shows it holds US$122.1m in cash, so it actually has US$59.7m net cash.

How Healthy Is Rollins' Balance Sheet?

The latest balance sheet data shows that Rollins had liabilities of US$467.4m due within a year, and liabilities of US$383.8m falling due after that. On the other hand, it had cash of US$122.1m and US$189.0m worth of receivables due within a year. So it has liabilities totalling US$540.0m more than its cash and near-term receivables, combined.

Since publicly traded Rollins shares are worth a very impressive total of US$20.1b, it seems unlikely that this level of liabilities would be a major 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, Rollins boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Rollins grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rollins can strengthen its balance sheet over time. 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 Rollins 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, Rollins recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Rollins's liabilities, but we can be reassured by the fact it has has net cash of US$59.7m. And it impressed us with free cash flow of US$449m, being 90% of its EBIT. So is Rollins's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Rollins would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.