Yahoo Finance These 4 Measures Indicate That Robert Walters (LON:RWA) Is Using Debt Safely
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Robert Walters plc (LON:RWA) makes use of debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 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 Robert Walters
How Much Debt Does Robert Walters Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Robert Walters had UK£15.7m of debt, an increase on none, over one year. However, it does have UK£142.3m in cash offsetting this, leading to net cash of UK£126.6m.
How Healthy Is Robert Walters' Balance Sheet?
The latest balance sheet data shows that Robert Walters had liabilities of UK£218.2m due within a year, and liabilities of UK£53.3m falling due after that. Offsetting this, it had UK£142.3m in cash and UK£190.3m in receivables that were due within 12 months. So it actually has UK£61.1m more liquid assets than total liabilities.
This excess liquidity suggests that Robert Walters is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Robert Walters has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Robert Walters grew its EBIT by 266% last year, which is an impressive improvement. That boost will make it even 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 Robert Walters 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. While Robert Walters 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. Happily for any shareholders, Robert Walters actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Robert Walters has net cash of UK£126.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in UK£20m. When it comes to Robert Walters's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. Case in point: We've spotted 3 warning signs for Robert Walters you should be aware of, and 1 of them is a bit concerning.
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.
