Rimoni Industries (TLV:RIMO) Could Easily Take On More 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.' 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 Rimoni Industries Ltd. (TLV:RIMO) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Rimoni Industries

What Is Rimoni Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Rimoni Industries had ₪32.9m of debt, an increase on ₪19.7m, over one year. However, it also had ₪19.0m in cash, and so its net debt is ₪14.0m.

A Look At Rimoni Industries' Liabilities

The latest balance sheet data shows that Rimoni Industries had liabilities of ₪65.1m due within a year, and liabilities of ₪5.85m falling due after that. Offsetting these obligations, it had cash of ₪19.0m as well as receivables valued at ₪46.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪5.05m.

Having regard to Rimoni Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₪561.2m company is short on cash, but still worth keeping an eye on the balance sheet.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Rimoni Industries has a low net debt to EBITDA ratio of only 0.26. And its EBIT easily covers its interest expense, being 360 times the size. So we're pretty relaxed about its super-conservative use of debt. On top of that, Rimoni Industries grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Rimoni Industries 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Rimoni Industries generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Rimoni Industries's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. It looks Rimoni Industries has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Rimoni Industries , 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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