RGB International Bhd (KLSE:RGB) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, RGB International Bhd. (KLSE:RGB) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for RGB International Bhd

What Is RGB International Bhd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2020 RGB International Bhd had debt of RM37.8m, up from RM20.3m in one year. However, its balance sheet shows it holds RM57.3m in cash, so it actually has RM19.6m net cash.

How Healthy Is RGB International Bhd's Balance Sheet?

We can see from the most recent balance sheet that RGB International Bhd had liabilities of RM208.5m falling due within a year, and liabilities of RM41.3m due beyond that. Offsetting this, it had RM57.3m in cash and RM194.8m in receivables that were 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 it's very unlikely that the RM216.1m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that RGB International Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, RGB International Bhd grew its EBIT by 6.6% in the last year, making that debt load look even more manageable. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. RGB International Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, RGB International Bhd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that RGB International Bhd has net cash of RM19.6m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 6.6% in the last twelve months. So we don't have any problem with RGB International Bhd's use of debt. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for RGB International Bhd 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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