Here's Why RGB International Bhd (KLSE:RGB) Can Afford Some 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that RGB International Bhd. (KLSE:RGB) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for RGB International Bhd

How Much Debt Does RGB International Bhd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 RGB International Bhd had RM34.6m of debt, an increase on RM20.8m, over one year. However, because it has a cash reserve of RM30.2m, its net debt is less, at about RM4.40m.

How Strong Is RGB International Bhd's Balance Sheet?

According to the last reported balance sheet, RGB International Bhd had liabilities of RM136.6m due within 12 months, and liabilities of RM34.8m due beyond 12 months. Offsetting these obligations, it had cash of RM30.2m as well as receivables valued at RM139.2m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that RGB International Bhd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM208.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RGB International Bhd 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.

Over 12 months, RGB International Bhd made a loss at the EBIT level, and saw its revenue drop to RM264m, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

Not only did RGB International Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM6.7m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM17m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that RGB International Bhd is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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