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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Reliv' International, Inc. (NASDAQ:RELV) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Reliv' International Carry?
You can click the graphic below for the historical numbers, but it shows that Reliv' International had US$500.0k of debt in June 2019, down from US$2.86m, one year before. However, it does have US$1.92m in cash offsetting this, leading to net cash of US$1.42m.
How Strong Is Reliv' International's Balance Sheet?
According to the last reported balance sheet, Reliv' International had liabilities of US$4.44m due within 12 months, and liabilities of US$626.7k due beyond 12 months. Offsetting this, it had US$1.92m in cash and US$460.8k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.68m.
Reliv' International has a market capitalization of US$7.07m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Reliv' International 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 you can't view debt in total isolation; since Reliv' International 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.
In the last year Reliv' International actually shrunk its revenue by 5.5%, to US$35m. That's not what we would hope to see.
So How Risky Is Reliv' International?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Reliv' International had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$1.7m of cash and made a loss of US$452k. But at least it has US$1.9m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Reliv' International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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