David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that RocTool SA (EPA: ALROC) uses debt in its operations. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Discover our latest analysis for RocTool
What is RocTool’s net debt?
As you can see below, RocTool had € 2.89 million in debt in June 2021, up from € 3.40 million the year before. However, he also had € 1.07m in cash, so his net debt is € 1.82m.
A look at RocTool’s responsibilities
Zooming in on the latest balance sheet data, we can see that RocTool had a liability of € 2.36m due within 12 months and a liability of € 2.99m due beyond. On the other hand, it had cash of € 1.07 million and € 3.79 million in receivables within one year. Its liabilities therefore amount to 492.1 K € more than the combination of its cash and short-term receivables.
Of course, RocTool has a market cap of 11.9 million euros, so this liability is probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. When analyzing debt levels, the balance sheet is the obvious starting point. But it is RocTool’s results that will influence the way the balance sheet is held in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Over the past year, RocTool has not been profitable in terms of EBIT, but has managed to increase its turnover by 6.9%, to 6.9 million euros. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
It is important to note that RocTool has recorded a loss of profit before interest and taxes (EBIT) over the past year. Indeed, it lost a very significant amount of € 1.7 million in terms of EBIT. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason for caution, € 616K of negative free cash flow over the last twelve months has been bled. In short, it’s a really risky title. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with RocTool (including 2 which are potentially serious).
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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