Would ReFuels (OB:REFL) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 ReFuels N.V. (OB:REFL) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ReFuels

What Is ReFuels's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ReFuels had debt of UK£28.3m, up from UK£13.4m in one year. However, because it has a cash reserve of UK£8.32m, its net debt is less, at about UK£20.0m.

How Healthy Is ReFuels' Balance Sheet?

According to the last reported balance sheet, ReFuels had liabilities of UK£78.5m due within 12 months, and liabilities of UK£4.38m due beyond 12 months. On the other hand, it had cash of UK£8.32m and UK£39.8m worth of receivables due within a year. So it has liabilities totalling UK£34.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ReFuels has a market capitalization of UK£67.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ReFuels's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ReFuels wasn't profitable at an EBIT level, but managed to grow its revenue by 132%, to UK£126m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though ReFuels managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping UK£12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£8.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that ReFuels is showing 4 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.