Is Rába Jármûipari Holding Nyrt (BUSE:RABA) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Rába Jármûipari Holding Nyrt. (BUSE:RABA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Rába Jármûipari Holding Nyrt

What Is Rába Jármûipari Holding Nyrt's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Rába Jármûipari Holding Nyrt had debt of Ft12.9b, up from Ft11.7b in one year. However, because it has a cash reserve of Ft2.22b, its net debt is less, at about Ft10.6b.

How Healthy Is Rába Jármûipari Holding Nyrt's Balance Sheet?

The latest balance sheet data shows that Rába Jármûipari Holding Nyrt had liabilities of Ft18.3b due within a year, and liabilities of Ft5.87b falling due after that. Offsetting this, it had Ft2.22b in cash and Ft7.02b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Ft14.9b.

This deficit is considerable relative to its market capitalization of Ft17.9b, so it does suggest shareholders should keep an eye on Rába Jármûipari Holding Nyrt's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rába Jármûipari Holding Nyrt 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 Rába Jármûipari Holding Nyrt had a loss before interest and tax, and actually shrunk its revenue by 24%, to Ft40b. That makes us nervous, to say the least.

Caveat Emptor

While Rába Jármûipari Holding Nyrt's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost Ft721m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of Ft2.0b into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Rába Jármûipari Holding Nyrt you should be aware of, and 1 of them is concerning.

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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