Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Reko International Group Inc. (CVE:REKO) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Reko International Group
How Much Debt Does Reko International Group Carry?
As you can see below, Reko International Group had CA$8.93m of debt, at January 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has CA$10.8m in cash to offset that, meaning it has CA$1.91m net cash.
How Healthy Is Reko International Group’s Balance Sheet?
We can see from the most recent balance sheet that Reko International Group had liabilities of CA$11.0m falling due within a year, and liabilities of CA$4.53m due beyond that. On the other hand, it had cash of CA$10.8m and CA$21.7m worth of receivables due within a year. So it can boast CA$17.0m more liquid assets than total liabilities.
This surplus strongly suggests that Reko International Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Reko International Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Although Reko International Group made a loss at the EBIT level, last year, it was also good to see that it generated CA$2.6m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Reko International Group will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Reko International Group 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 year, Reko International Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Reko International Group has net cash of CA$1.91m, as well as more liquid assets than liabilities. So we don’t have any problem with Reko International Group’s use of debt. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 3 warning signs for Reko International Group (1 is significant) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.