Is RCM Beteiligungs (ETR:RCMN) 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. Importantly, RCM Beteiligungs AG (ETR:RCMN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for RCM Beteiligungs

How Much Debt Does RCM Beteiligungs Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 RCM Beteiligungs had €10.1m of debt, an increase on €9.59m, over one year. However, it also had €1.13m in cash, and so its net debt is €9.02m.

A Look At RCM Beteiligungs' Liabilities

According to the last reported balance sheet, RCM Beteiligungs had liabilities of €11.4m due within 12 months, and liabilities of €506.9k due beyond 12 months. Offsetting these obligations, it had cash of €1.13m as well as receivables valued at €108.6k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.7m.

This deficit is considerable relative to its market capitalization of €15.2m, so it does suggest shareholders should keep an eye on RCM Beteiligungs' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is RCM Beteiligungs'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, RCM Beteiligungs made a loss at the EBIT level, and saw its revenue drop to €2.6m, which is a fall of 71%. That makes us nervous, to say the least.

Caveat Emptor

Not only did RCM Beteiligungs's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €222k. 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. For example, we would not want to see a repeat of last year's loss of €1.6m. So we do think this stock is quite risky. 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 4 warning signs for RCM Beteiligungs (2 are a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.