RTC Group (LON:RTC) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that RTC Group plc (LON:RTC) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 RTC Group

What Is RTC Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 RTC Group had debt of UK£2.17m, up from UK£795.0k in one year. However, it also had UK£737.0k in cash, and so its net debt is UK£1.43m.

A Look At RTC Group's Liabilities

We can see from the most recent balance sheet that RTC Group had liabilities of UK£11.0m falling due within a year, and liabilities of UK£2.81m due beyond that. On the other hand, it had cash of UK£737.0k and UK£15.1m worth of receivables due within a year. So it actually has UK£1.98m more liquid assets than total liabilities.

This surplus liquidity suggests that RTC Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 RTC Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, RTC Group made a loss at the EBIT level, and saw its revenue drop to UK£82m, which is a fall of 7.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, RTC Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£1.5m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. For example, we've discovered 5 warning signs for RTC Group (3 are significant!) that you should be aware of before investing here.

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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