Is Rollins (NYSE: ROL) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s 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. Like many other companies Rollins, Inc. (NYSE: ROL) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels together.
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How much debt does Rollins have?
You can click on the chart below for historical numbers, but it shows Rollins owed $ 88.1 million in debt as of June 2021, up from $ 255.8 million a year earlier. But on the other hand, it also has $ 128.5 million in cash, which leads to a net cash position of $ 40.4 million.
How strong is Rollins’ balance sheet?
According to the latest published balance sheet, Rollins had debts of US $ 518.7 million due within 12 months and debts of US $ 352.3 million due beyond 12 months. In return, he had $ 128.5 million in cash and $ 168.3 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 574.2 million.
Of course, Rollins has a titanic market cap of $ 19.4 billion, so those liabilities are likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While he has some liabilities to note, Rollins also has more cash than debt, so we’re pretty confident he can handle his debt safely.
Another good sign is that Rollins was able to increase its EBIT by 28% in twelve months, making it easier to pay off debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Rollins’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Rollins may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Rollins has generated free cash flow of 99% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
We could understand if investors are concerned about Rollins’ liabilities, but we can take comfort in the fact that he has net cash of $ 40.4 million. The icing on the cake was that he converted 99% of that EBIT into free cash flow, bringing in US $ 396 million. So is Rollins’ debt a risk? It does not seem to us. Over time, stock prices tend to follow earnings per share, so if you are interested in Rollins, you may want to click here to view an interactive chart of its earnings per share history.
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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