Rollins (NYSE:ROL) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Rollins, Inc. (NYSE:ROL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Rollins

How Much Debt Does Rollins Carry?

The image below, which you can click on for greater detail, shows that Rollins had debt of US$115.2m at the end of March 2021, a reduction from US$320.8m over a year. However, its balance sheet shows it holds US$117.3m in cash, so it actually has US$2.12m net cash.

How Strong Is Rollins' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rollins had liabilities of US$507.8m due within 12 months and liabilities of US$380.2m due beyond that. Offsetting these obligations, it had cash of US$117.3m as well as receivables valued at US$144.8m due within 12 months. So it has liabilities totalling US$625.8m more than its cash and near-term receivables, combined.

Given Rollins has a humongous market capitalization of US$17.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Rollins boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Rollins grew its EBIT by 25% 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Rollins 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. During the last three years, Rollins generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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$2.12m. And it impressed us with free cash flow of US$439m, being 99% of its EBIT. So we don't think Rollins's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Rollins, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.
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