Yahoo Finance Redcentric (LON:RCN) Has A Pretty Healthy Balance Sheet
Warren Buffett famously said, '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. We note that Redcentric plc (LON:RCN) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Redcentric
What Is Redcentric's Debt?
The image below, which you can click on for greater detail, shows that Redcentric had debt of UK£1.49m at the end of March 2021, a reduction from UK£12.6m over a year. But on the other hand it also has UK£5.25m in cash, leading to a UK£3.76m net cash position.
A Look At Redcentric's Liabilities
According to the last reported balance sheet, Redcentric had liabilities of UK£27.9m due within 12 months, and liabilities of UK£19.3m due beyond 12 months. On the other hand, it had cash of UK£5.25m and UK£19.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£22.9m.
Since publicly traded Redcentric shares are worth a total of UK£208.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Redcentric also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although Redcentric made a loss at the EBIT level, last year, it was also good to see that it generated UK£8.5m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Redcentric 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, a company can only pay off debt with cold hard cash, not accounting profits. Redcentric 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. Happily for any shareholders, Redcentric actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While Redcentric does have more liabilities than liquid assets, it also has net cash of UK£3.76m. And it impressed us with free cash flow of UK£14m, being 171% of its EBIT. So we don't have any problem with Redcentric's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Redcentric (including 1 which 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
