Is RifaLtd (KRX:000760) Using Debt In A Risky Way?

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.' 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. Importantly, Rifa Co.,Ltd. (KRX:000760) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

View our latest analysis for RifaLtd

What Is RifaLtd's Debt?

The chart below, which you can click on for greater detail, shows that RifaLtd had ₩85.4b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₩20.1b, its net debt is less, at about ₩65.3b.

How Strong Is RifaLtd's Balance Sheet?

According to the last reported balance sheet, RifaLtd had liabilities of ₩95.3b due within 12 months, and liabilities of ₩14.2b due beyond 12 months. Offsetting this, it had ₩20.1b in cash and ₩14.7b in receivables that were due within 12 months. So it has liabilities totalling ₩74.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩44.4b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, RifaLtd would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is RifaLtd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year RifaLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to ₩50b. To be frank that doesn't bode well.

Caveat Emptor

While RifaLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩3.0b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩5.3b. And until that time we think this is a risky stock. 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. To that end, you should learn about the 2 warning signs we've spotted with RifaLtd (including 1 which is a bit concerning) .

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. 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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