Is Rhinomed (ASX:RNO) 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. We note that Rhinomed Limited (ASX:RNO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rhinomed

How Much Debt Does Rhinomed Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Rhinomed had AU$4.48m of debt, an increase on none, over one year. However, because it has a cash reserve of AU$3.63m, its net debt is less, at about AU$846.3k.

How Strong Is Rhinomed's Balance Sheet?

According to the last reported balance sheet, Rhinomed had liabilities of AU$8.85m due within 12 months, and liabilities of AU$201.6k due beyond 12 months. Offsetting these obligations, it had cash of AU$3.63m as well as receivables valued at AU$1.42m due within 12 months. So it has liabilities totalling AU$4.00m more than its cash and near-term receivables, combined.

Of course, Rhinomed has a market capitalization of AU$28.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Rhinomed will need earnings to service that debt. 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.

In the last year Rhinomed wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to AU$9.4m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Rhinomed still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$7.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$7.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Rhinomed you should be aware of, and 2 of them are concerning.

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.