Is Rainbow Tours (WSE:RBW) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Rainbow Tours S.A. (WSE:RBW) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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.

View our latest analysis for Rainbow Tours

How Much Debt Does Rainbow Tours Carry?

As you can see below, at the end of March 2021, Rainbow Tours had zł152.7m of debt, up from zł137.8m a year ago. Click the image for more detail. However, it does have zł67.0m in cash offsetting this, leading to net debt of about zł85.6m.

How Strong Is Rainbow Tours' Balance Sheet?

The latest balance sheet data shows that Rainbow Tours had liabilities of zł304.5m due within a year, and liabilities of zł109.8m falling due after that. Offsetting this, it had zł67.0m in cash and zł216.3m in receivables that were due within 12 months. So it has liabilities totalling zł130.9m more than its cash and near-term receivables, combined.

Rainbow Tours has a market capitalization of zł349.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 you can't view debt in total isolation; since Rainbow Tours 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.

Over 12 months, Rainbow Tours made a loss at the EBIT level, and saw its revenue drop to zł236m, which is a fall of 87%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Rainbow Tours's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping zł61m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through zł20m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 4 warning signs for Rainbow Tours you should be aware of, and 2 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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