Read-Gene (WSE:RDG) Is Making Moderate Use Of Debt

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 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. Importantly, Read-Gene S.A. (WSE:RDG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Read-Gene

What Is Read-Gene's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Read-Gene had debt of zł6.26m, up from zł4.86m in one year. However, it also had zł5.64m in cash, and so its net debt is zł622.7k.

How Strong Is Read-Gene's Balance Sheet?

We can see from the most recent balance sheet that Read-Gene had liabilities of zł4.74m falling due within a year, and liabilities of zł6.26m due beyond that. Offsetting this, it had zł5.64m in cash and zł2.57m in receivables that were due within 12 months. So its liabilities total zł2.79m more than the combination of its cash and short-term receivables.

Of course, Read-Gene has a market capitalization of zł54.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Read-Gene has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Read-Gene's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Read-Gene wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to zł10m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Read-Gene's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at zł1.5m. 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 zł1.2m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. For example, we've discovered 4 warning signs for Read-Gene (2 are a bit unpleasant!) 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.

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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.