These 4 Measures Indicate That Rollins (NYSE:ROL) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Rollins, Inc. (NYSE:ROL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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$68.0m at the end of September 2021, a reduction from US$170.7m over a year. But on the other hand it also has US$117.7m in cash, leading to a US$49.7m net cash position.

How Strong Is Rollins' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rollins had liabilities of US$477.5m due within 12 months and liabilities of US$325.7m due beyond that. Offsetting these obligations, it had cash of US$117.7m as well as receivables valued at US$180.2m due within 12 months. So its liabilities total US$505.4m more than the combination of its cash and short-term receivables.

Of course, Rollins has a titanic market capitalization of US$15.8b, so these liabilities are probably manageable. 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, Rollins also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Rollins grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 95% 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$49.7m. And it impressed us with free cash flow of US$369m, being 95% of its EBIT. So is Rollins's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Rollins you should know about.

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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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.