Is Rieter Holding (VTX:RIEN) Weighed On By Its Debt Load?

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. We note that Rieter Holding AG (VTX:RIEN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Rieter Holding

What Is Rieter Holding's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Rieter Holding had debt of CHF227.7m, up from CHF119.0m in one year. However, its balance sheet shows it holds CHF283.2m in cash, so it actually has CHF55.5m net cash.

How Strong Is Rieter Holding's Balance Sheet?

We can see from the most recent balance sheet that Rieter Holding had liabilities of CHF428.3m falling due within a year, and liabilities of CHF184.3m due beyond that. Offsetting this, it had CHF283.2m in cash and CHF68.5m in receivables that were due within 12 months. So it has liabilities totalling CHF260.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Rieter Holding has a market capitalization of CHF539.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Rieter Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rieter Holding 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.

In the last year Rieter Holding had a loss before interest and tax, and actually shrunk its revenue by 25%, to CHF573m. That makes us nervous, to say the least.

So How Risky Is Rieter Holding?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Rieter Holding had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CHF78m and booked a CHF90m accounting loss. Given it only has net cash of CHF55.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 - Rieter Holding has 1 warning sign we think you should be aware of.

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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