Is Regenx Tech (CSE:RGX) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Regenx Tech Corp. (CSE:RGX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Regenx Tech

What Is Regenx Tech's Debt?

As you can see below, at the end of June 2024, Regenx Tech had CA$5.41m of debt, up from CA$4.27m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$1.43m, its net debt is less, at about CA$3.98m.

How Healthy Is Regenx Tech's Balance Sheet?

According to the last reported balance sheet, Regenx Tech had liabilities of CA$302.9k due within 12 months, and liabilities of CA$5.78m due beyond 12 months. On the other hand, it had cash of CA$1.43m and CA$941.8k worth of receivables due within a year. So it has liabilities totalling CA$3.71m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Regenx Tech has a market capitalization of CA$9.89m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Regenx Tech'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Regenx Tech finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Regenx Tech had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$4.7m. 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. However, it doesn't help that it burned through CA$4.8m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 6 warning signs for Regenx Tech that you should be aware of.

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.