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.' 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 Reko International Group Inc. (CVE:REKO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

The image below, which you can click on for greater detail, shows that Reko International Group had debt of CA$11.2m at the end of April 2024, a reduction from CA$12.4m over a year. However, it does have CA$7.60m in cash offsetting this, leading to net debt of about CA$3.62m.

How Healthy Is Reko International Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Reko International Group had liabilities of CA$8.46m due within 12 months and liabilities of CA$7.01m due beyond that. On the other hand, it had cash of CA$7.60m and CA$22.7m worth of receivables due within a year. So it actually has CA$14.9m more liquid assets than total liabilities.

This luscious liquidity implies that Reko International Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Reko International Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$289k. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. 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. 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 3 warning signs for Reko International Group (2 are significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.