Health Check: How Prudently Does Rambus (NASDAQ:RMBS) Use Debt?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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, Rambus Inc. (NASDAQ:RMBS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Rambus
What Is Rambus's Net Debt?
As you can see below, Rambus had US$147.0m of debt at September 2019, down from US$176.8m a year prior. But on the other hand it also has US$338.0m in cash, leading to a US$191.0m net cash position.
How Strong Is Rambus's Balance Sheet?
We can see from the most recent balance sheet that Rambus had liabilities of US$88.3m falling due within a year, and liabilities of US$250.3m due beyond that. Offsetting this, it had US$338.0m in cash and US$221.5m in receivables that were due within 12 months. So it actually has US$221.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Rambus could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Rambus has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Rambus can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Rambus made a loss at the EBIT level, and saw its revenue drop to US$233m, which is a fall of 12%. We would much prefer see growth.
So How Risky Is Rambus?
While Rambus lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$126m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Rambus insider transactions.
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.
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