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We Think RBC Bearings (NASDAQ:ROLL) Can Stay On Top Of Its Debt

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  • ROLL
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, RBC Bearings Incorporated (NASDAQ:ROLL) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for RBC Bearings

How Much Debt Does RBC Bearings Carry?

As you can see below, RBC Bearings had US$7.61m of debt at October 2021, down from US$20.4m a year prior. However, its balance sheet shows it holds US$1.35b in cash, so it actually has US$1.34b net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At RBC Bearings' Liabilities

Zooming in on the latest balance sheet data, we can see that RBC Bearings had liabilities of US$112.3m due within 12 months and liabilities of US$118.4m due beyond that. Offsetting this, it had US$1.35b in cash and US$116.4m in receivables that were due within 12 months. So it actually has US$1.23b more liquid assets than total liabilities.

It's good to see that RBC Bearings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, RBC Bearings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, RBC Bearings's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 RBC Bearings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While RBC Bearings 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. During the last three years, RBC Bearings generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that RBC Bearings has net cash of US$1.34b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$159m, being 89% of its EBIT. So we don't think RBC Bearings's use of debt is risky. 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. For example, we've discovered 1 warning sign for RBC Bearings that you should be aware of before investing here.

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.

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