Does Rare Foods Australia (ASX:RFA) Have A Healthy Balance Sheet?

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 Rare Foods Australia Limited (ASX:RFA) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Rare Foods Australia

What Is Rare Foods Australia's Debt?

As you can see below, at the end of December 2024, Rare Foods Australia had AU$2.72m of debt, up from AU$2.03m a year ago. Click the image for more detail. On the flip side, it has AU$214.1k in cash leading to net debt of about AU$2.50m.

How Strong Is Rare Foods Australia's Balance Sheet?

The latest balance sheet data shows that Rare Foods Australia had liabilities of AU$3.72m due within a year, and liabilities of AU$2.29m falling due after that. On the other hand, it had cash of AU$214.1k and AU$1.22m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$4.57m.

This is a mountain of leverage relative to its market capitalization of AU$6.53m. 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 you can't view debt in total isolation; since Rare Foods Australia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Rare Foods Australia made a loss at the EBIT level, and saw its revenue drop to AU$4.4m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Rare Foods Australia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$3.5m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$2.4m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Rare Foods Australia is showing 6 warning signs in our investment analysis , and 5 of those are a bit concerning...

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.