Would RA International Group (LON:RAI) Be Better Off With Less Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that RA International Group plc (LON:RAI) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for RA International Group

What Is RA International Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 RA International Group had debt of US$15.8m, up from US$14.0m in one year. However, it also had US$9.92m in cash, and so its net debt is US$5.86m.

How Strong Is RA International Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RA International Group had liabilities of US$10.4m due within 12 months and liabilities of US$19.6m due beyond that. Offsetting these obligations, it had cash of US$9.92m as well as receivables valued at US$13.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.88m.

While this might seem like a lot, it is not so bad since RA International Group has a market capitalization of US$14.9m, 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 you can't view debt in total isolation; since RA International Group will need earnings to service that debt. 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, RA International Group made a loss at the EBIT level, and saw its revenue drop to US$58m, which is a fall of 8.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months RA International Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$4.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$819k of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with RA International Group (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.