Rectifier Technologies (ASX:RFT) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Rectifier Technologies Limited (ASX:RFT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Rectifier Technologies

How Much Debt Does Rectifier Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that Rectifier Technologies had AU$2.59m of debt in December 2021, down from AU$3.69m, one year before. However, its balance sheet shows it holds AU$4.24m in cash, so it actually has AU$1.66m net cash.

How Strong Is Rectifier Technologies' Balance Sheet?

According to the last reported balance sheet, Rectifier Technologies had liabilities of AU$4.14m due within 12 months, and liabilities of AU$3.33m due beyond 12 months. On the other hand, it had cash of AU$4.24m and AU$3.98m worth of receivables due within a year. So it actually has AU$753.1k more liquid assets than total liabilities.

This state of affairs indicates that Rectifier Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$68.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Rectifier Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Rectifier Technologies's EBIT fell a jaw-dropping 71% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Rectifier Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Rectifier Technologies generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Rectifier Technologies has net cash of AU$1.66m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -AU$896k, being 90% of its EBIT. 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. We've identified 4 warning signs with Rectifier Technologies , and understanding them should be part of your investment process.

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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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.