Is RA International Group (LON:RAI) Using Too Much Debt?

Simply Wall St · 09/15/2023 05:12

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 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. As with many other companies RA International Group plc (LON:RAI) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for RA International Group

What Is RA International Group's Net Debt?

The chart below, which you can click on for greater detail, shows that RA International Group had US$14.0m in debt in June 2023; about the same as the year before. On the flip side, it has US$12.2m in cash leading to net debt of about US$1.79m.

debt-equity-history-analysis
AIM:RAI Debt to Equity History September 15th 2023

How Healthy Is RA International Group's Balance Sheet?

The latest balance sheet data shows that RA International Group had liabilities of US$7.75m due within a year, and liabilities of US$19.4m falling due after that. On the other hand, it had cash of US$12.2m and US$12.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.60m.

Since publicly traded RA International Group shares are worth a total of US$18.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 RA International Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, RA International Group reported revenue of US$64m, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months RA International Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$6.1m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$12m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for RA International Group (1 is significant!) that you should be aware of before investing here.

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.