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. We can see that Rockwell Medical, Inc. (NASDAQ:RMTI) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Rockwell Medical's Debt?
As you can see below, at the end of June 2019, Rockwell Medical had US$1.91m of debt, up from none a year ago. Click the image for more detail. But it also has US$35.2m in cash to offset that, meaning it has US$33.3m net cash.
How Strong Is Rockwell Medical's Balance Sheet?
We can see from the most recent balance sheet that Rockwell Medical had liabilities of US$14.8m falling due within a year, and liabilities of US$12.6m due beyond that. Offsetting these obligations, it had cash of US$35.2m as well as receivables valued at US$5.39m due within 12 months. So it actually has US$13.1m more liquid assets than total liabilities.
This surplus suggests that Rockwell Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Rockwell Medical 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 it is future earnings, more than anything, that will determine Rockwell Medical's ability to maintain a healthy balance sheet going forward. 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, Rockwell Medical reported revenue of US$64m, which is a gain of 7.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Rockwell Medical?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Rockwell Medical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$28m of cash and made a loss of US$33m. But at least it has US$33.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Rockwell Medical I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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