Does Rogers Sugar (TSE:RSI) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Rogers Sugar Inc. (TSE:RSI) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rogers Sugar

What Is Rogers Sugar's Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2020 Rogers Sugar had CA$349.4m of debt, an increase on CA$330.9m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Rogers Sugar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rogers Sugar had liabilities of CA$168.8m due within 12 months and liabilities of CA$448.1m due beyond that. Offsetting this, it had CA$1.97m in cash and CA$95.4m in receivables that were due within 12 months. So it has liabilities totalling CA$519.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$580.8m, so it does suggest shareholders should keep an eye on Rogers Sugar's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Rogers Sugar has a debt to EBITDA ratio of 3.8 and its EBIT covered its interest expense 3.9 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. More concerning, Rogers Sugar saw its EBIT drop by 4.4% in the last twelve months. If it keeps going like that paying off its debt will be like running on a treadmill -- a lot of effort for not much advancement. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Rogers Sugar can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Rogers Sugar recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

At the end of the day, we're far from enamoured with Rogers Sugar's ability to handle its total liabilities or handle its debt, based on its EBITDA,. But at least its conversion of EBIT to free cash flow is not so bad. Overall, we think it's fair to say that Rogers Sugar has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Rogers Sugar (2 make us uncomfortable!) 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. 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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