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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 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. Importantly, Robert Walters plc (LON:RWA) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Robert Walters's Debt?
As you can see below, Robert Walters had UK£9.40m of debt at June 2021, down from UK£14.4m a year prior. However, its balance sheet shows it holds UK£132.2m in cash, so it actually has UK£122.8m net cash.
A Look At Robert Walters' Liabilities
According to the last reported balance sheet, Robert Walters had liabilities of UK£172.6m due within 12 months, and liabilities of UK£51.1m due beyond 12 months. Offsetting this, it had UK£132.2m in cash and UK£164.7m in receivables that were due within 12 months. So it actually has UK£73.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Robert Walters could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Robert Walters boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Robert Walters grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Robert Walters's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Robert Walters actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Robert Walters has net cash of UK£122.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 163% of that EBIT to free cash flow, bringing in UK£42m. So is Robert Walters'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. Case in point: We've spotted 2 warning signs for Robert Walters you should be aware of.
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.
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.
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