Is Red River Resources (ASX:RVR) Using Too Much Debt?

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. As with many other companies Red River Resources Limited (ASX:RVR) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Red River Resources

What Is Red River Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Red River Resources had AU$7.37m of debt, an increase on AU$134.0k, over one year. But it also has AU$8.08m in cash to offset that, meaning it has AU$713.0k net cash.

A Look At Red River Resources's Liabilities

According to the last reported balance sheet, Red River Resources had liabilities of AU$26.0m due within 12 months, and liabilities of AU$13.0m due beyond 12 months. Offsetting these obligations, it had cash of AU$8.08m as well as receivables valued at AU$3.31m due within 12 months. So it has liabilities totalling AU$27.6m more than its cash and near-term receivables, combined.

Red River Resources has a market capitalization of AU$137.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Red River Resources boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Red River Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Red River Resources had a loss before interest and tax, and actually shrunk its revenue by 34%, to AU$63m. That makes us nervous, to say the least.

So How Risky Is Red River Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Red River Resources lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$25m and booked a AU$6.9m accounting loss. With only AU$713.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Red River Resources that you should be aware of before investing here.

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. 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.
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