Is Rainbow Tours (WSE:RBW) Using Too Much Debt?

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. As with many other companies Rainbow Tours S.A. (WSE:RBW) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Rainbow Tours

How Much Debt Does Rainbow Tours Carry?

As you can see below, Rainbow Tours had zł124.8m of debt at September 2021, down from zł136.7m a year prior. However, it does have zł142.7m in cash offsetting this, leading to net cash of zł17.9m.

How Strong Is Rainbow Tours' Balance Sheet?

According to the last reported balance sheet, Rainbow Tours had liabilities of zł408.0m due within 12 months, and liabilities of zł137.3m due beyond 12 months. On the other hand, it had cash of zł142.7m and zł259.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł143.2m.

Rainbow Tours has a market capitalization of zł312.9m, 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. While it does have liabilities worth noting, Rainbow Tours also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Rainbow Tours turned things around in the last 12 months, delivering and EBIT of zł8.6m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Rainbow Tours's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Rainbow Tours 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. Happily for any shareholders, Rainbow Tours actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Rainbow Tours's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł17.9m. The cherry on top was that in converted 1,317% of that EBIT to free cash flow, bringing in zł113m. So we don't have any problem with Rainbow Tours's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Rainbow Tours is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.

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.

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