Is RM (LON:RM.) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that RM plc (LON:RM.) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for RM

What Is RM's Debt?

The image below, which you can click on for greater detail, shows that at November 2023 RM had debt of UK£53.7m, up from UK£48.7m in one year. On the flip side, it has UK£8.06m in cash leading to net debt of about UK£45.6m.

A Look At RM's Liabilities

Zooming in on the latest balance sheet data, we can see that RM had liabilities of UK£49.4m due within 12 months and liabilities of UK£72.6m due beyond that. Offsetting these obligations, it had cash of UK£8.06m as well as receivables valued at UK£29.2m due within 12 months. So its liabilities total UK£84.7m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's UK£81.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if RM can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year RM had a loss before interest and tax, and actually shrunk its revenue by 8.9%, to UK£195m. That's not what we would hope to see.

Caveat Emptor

Importantly, RM had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£8.9m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of UK£809k over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 2 warning signs for RM you should be aware of, and 1 of them is a bit unpleasant.

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.