Is Reko International Group (CVE:REKO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Reko International Group Inc. (CVE:REKO) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Reko International Group

What Is Reko International Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Reko International Group had CA$10.6m of debt in October 2024, down from CA$12.1m, one year before. However, its balance sheet shows it holds CA$13.8m in cash, so it actually has CA$3.24m net cash.

A Look At Reko International Group's Liabilities

The latest balance sheet data shows that Reko International Group had liabilities of CA$6.50m due within a year, and liabilities of CA$9.43m falling due after that. Offsetting these obligations, it had cash of CA$13.8m as well as receivables valued at CA$17.3m due within 12 months. So it actually has CA$15.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Reko International Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Reko International Group 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 it is Reko International Group'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.

In the last year Reko International Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to CA$41m. That's not what we would hope to see.

So How Risky Is Reko International Group?

While Reko International Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$7.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Reko International Group you should be aware of, and 2 of them are potentially serious.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.