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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that RiceBran Technologies (NASDAQ:RIBT) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does RiceBran Technologies Carry?
As you can see below, at the end of June 2019, RiceBran Technologies had US$427.0k of debt, up from US$14.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds US$7.19m in cash, so it actually has US$6.76m net cash.
How Healthy Is RiceBran Technologies's Balance Sheet?
According to the last reported balance sheet, RiceBran Technologies had liabilities of US$6.38m due within 12 months, and liabilities of US$3.06m due beyond 12 months. On the other hand, it had cash of US$7.19m and US$4.55m worth of receivables due within a year. So it can boast US$2.30m more liquid assets than total liabilities.
This short term liquidity is a sign that RiceBran Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, RiceBran Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! 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 RiceBran Technologies 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.
In the last year RiceBran Technologies managed to grow its revenue by 54%, to US$21m. With any luck the company will be able to grow its way to profitability.
So How Risky Is RiceBran Technologies?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months RiceBran Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13m and booked a US$11m accounting loss. Given it only has net cash of US$7.2m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, RiceBran Technologies may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 RiceBran Technologies 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.