Reko International Group (CVE:REKO) Is Making Moderate Use Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Reko International Group Inc. (CVE:REKO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

View our latest analysis for Reko International Group

What Is Reko International Group's Debt?

As you can see below, Reko International Group had CA$11.2m of debt at April 2024, down from CA$12.4m a year prior. However, it does have CA$7.60m in cash offsetting this, leading to net debt of about CA$3.62m.

How Strong Is Reko International Group's Balance Sheet?

We can see from the most recent balance sheet that Reko International Group had liabilities of CA$8.46m falling due within a year, and liabilities of CA$7.01m due beyond that. Offsetting these obligations, it had cash of CA$7.60m as well as receivables valued at CA$22.7m due within 12 months. So it actually has CA$14.9m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Reko International Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Reko International Group made a loss at the EBIT level, and saw its revenue drop to CA$46m, which is a fall of 8.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Reko International Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$289k at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Reko International Group has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com