Does Rectifier Technologies (ASX:RFT) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Rectifier Technologies Ltd (ASX:RFT) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Rectifier Technologies's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Rectifier Technologies had debt of AU$2.38m, up from AU$2.24m in one year. But on the other hand it also has AU$4.78m in cash, leading to a AU$2.40m net cash position.

A Look At Rectifier Technologies' Liabilities

According to the last reported balance sheet, Rectifier Technologies had liabilities of AU$9.52m due within 12 months, and liabilities of AU$2.87m due beyond 12 months. Offsetting this, it had AU$4.78m in cash and AU$4.07m in receivables that were due within 12 months. So its liabilities total AU$3.54m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Rectifier Technologies is worth AU$8.30m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Rectifier Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Rectifier Technologies

Also positive, Rectifier Technologies grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Rectifier Technologies's earnings that will influence how the balance sheet holds up in the future. 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 .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Rectifier Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Rectifier Technologies created free cash flow amounting to 8.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Rectifier Technologies does have more liabilities than liquid assets, it also has net cash of AU$2.40m. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't have any problem with Rectifier Technologies's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Rectifier Technologies you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.