Is RMH Holdings (HKG:8437) 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.' 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. As with many other companies RMH Holdings Limited (HKG:8437) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for RMH Holdings

How Much Debt Does RMH Holdings Carry?

As you can see below, at the end of June 2021, RMH Holdings had S$5.39m of debt, up from S$2.95m a year ago. Click the image for more detail. But it also has S$6.55m in cash to offset that, meaning it has S$1.15m net cash.

How Healthy Is RMH Holdings' Balance Sheet?

According to the last reported balance sheet, RMH Holdings had liabilities of S$6.24m due within 12 months, and liabilities of S$7.09m due beyond 12 months. On the other hand, it had cash of S$6.55m and S$2.10m worth of receivables due within a year. So its liabilities total S$4.68m more than the combination of its cash and short-term receivables.

Of course, RMH Holdings has a market capitalization of S$37.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, RMH Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since RMH Holdings 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.

In the last year RMH Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to S$9.5m. With any luck the company will be able to grow its way to profitability.

So How Risky Is RMH Holdings?

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 RMH Holdings 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 S$4.1m and booked a S$11m accounting loss. Given it only has net cash of S$1.15m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, RMH Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 4 warning signs with RMH Holdings (at least 1 which is concerning) , and understanding them should be part of your investment process.

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. 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.
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