Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Retractable Technologies, Inc. (NYSEMKT:RVP) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Retractable Technologies's Debt?
As you can see below, Retractable Technologies had US$2.84m of debt at June 2019, down from US$3.25m a year prior. However, its balance sheet shows it holds US$11.3m in cash, so it actually has US$8.42m net cash.
How Healthy Is Retractable Technologies's Balance Sheet?
According to the last reported balance sheet, Retractable Technologies had liabilities of US$7.94m due within 12 months, and liabilities of US$2.56m due beyond 12 months. Offsetting this, it had US$11.3m in cash and US$6.26m in receivables that were due within 12 months. So it actually has US$7.02m more liquid assets than total liabilities.
This surplus suggests that Retractable Technologies is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Retractable Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Retractable Technologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Retractable Technologies's revenue was pretty flat. While that hardly impresses, its not too bad either.
So How Risky Is Retractable Technologies?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Retractable Technologies had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$1.1m of cash and made a loss of US$655k. But the saving grace is the US$11m on the balance sheet. That means it could keep spending at its current rate for more than five years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Retractable Technologies's profit, revenue, and operating cashflow have changed over the last few years.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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