Regis Resources (ASX:RRL) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Regis Resources Limited (ASX:RRL) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Regis Resources

What Is Regis Resources's Debt?

The chart below, which you can click on for greater detail, shows that Regis Resources had AU$295.1m in debt in June 2024; about the same as the year before. On the flip side, it has AU$277.9m in cash leading to net debt of about AU$17.2m.

How Strong Is Regis Resources' Balance Sheet?

According to the last reported balance sheet, Regis Resources had liabilities of AU$433.9m due within 12 months, and liabilities of AU$340.1m due beyond 12 months. Offsetting these obligations, it had cash of AU$277.9m as well as receivables valued at AU$12.7m due within 12 months. So its liabilities total AU$483.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Regis Resources is worth AU$1.47b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Carrying virtually no net debt, Regis Resources has a very light debt load indeed. 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 Regis Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Regis Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to AU$1.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Regis Resources had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$133m. 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 AU$186m into a profit. In the meantime, we consider the stock very risky. For riskier companies like Regis Resources 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.

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.