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 RigNet, Inc. (NASDAQ:RNET) does use debt in its business. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is RigNet's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 RigNet had US$110.5m of debt, an increase on US$58.1m, over one year. However, because it has a cash reserve of US$10.9m, its net debt is less, at about US$99.6m.
How Strong Is RigNet's Balance Sheet?
We can see from the most recent balance sheet that RigNet had liabilities of US$70.9m falling due within a year, and liabilities of US$128.1m due beyond that. Offsetting these obligations, it had cash of US$10.9m as well as receivables valued at US$76.6m due within 12 months. So it has liabilities totalling US$111.6m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$148.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if RigNet 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, RigNet reported revenue of US$243m, which is a gain of 9.6%. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, RigNet had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$4.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$54m of cash over the last year. So in short it's a really risky stock. For riskier companies like RigNet 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.
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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