Is REC Silicon (OB:RECSI) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that REC Silicon ASA (OB:RECSI) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for REC Silicon

What Is REC Silicon's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 REC Silicon had debt of US$147.8m, up from US$131.4m in one year. On the flip side, it has US$134.9m in cash leading to net debt of about US$12.9m.

How Strong Is REC Silicon's Balance Sheet?

The latest balance sheet data shows that REC Silicon had liabilities of US$59.6m due within a year, and liabilities of US$222.8m falling due after that. Offsetting these obligations, it had cash of US$134.9m as well as receivables valued at US$21.9m due within 12 months. So its liabilities total US$125.6m more than the combination of its cash and short-term receivables.

Of course, REC Silicon has a market capitalization of US$723.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if REC Silicon can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, REC Silicon made a loss at the EBIT level, and saw its revenue drop to US$122m, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

While REC Silicon'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 US$33m. 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 US$3.5m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. Case in point: We've spotted 3 warning signs for REC Silicon you should be aware of.

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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