Is REC Silicon (OB:RECSI) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that REC Silicon ASA (OB:RECSI) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for REC Silicon

What Is REC Silicon's Debt?

You can click the graphic below for the historical numbers, but it shows that REC Silicon had US$115.8m of debt in March 2022, down from US$147.9m, one year before. However, its balance sheet shows it holds US$204.0m in cash, so it actually has US$88.2m net cash.

How Healthy Is REC Silicon's Balance Sheet?

The latest balance sheet data shows that REC Silicon had liabilities of US$38.2m due within a year, and liabilities of US$217.6m falling due after that. Offsetting these obligations, it had cash of US$204.0m as well as receivables valued at US$21.9m due within 12 months. So its liabilities total US$29.9m more than the combination of its cash and short-term receivables.

Given REC Silicon has a market capitalization of US$871.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, REC Silicon boasts net cash, so it's fair to say it does not have a heavy debt load! 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 reported revenue of US$150m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is REC Silicon?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months REC Silicon lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$28m of cash and made a loss of US$44m. But the saving grace is the US$88.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for REC Silicon that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.