Does Rex International Holding (SGX:5WH) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Rex International Holding Limited (SGX:5WH) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Rex International Holding

What Is Rex International Holding's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Rex International Holding had debt of US$91.9m, up from US$55.6m in one year. But it also has US$139.0m in cash to offset that, meaning it has US$47.1m net cash.

How Healthy Is Rex International Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rex International Holding had liabilities of US$143.9m due within 12 months and liabilities of US$344.8m due beyond that. Offsetting this, it had US$139.0m in cash and US$85.4m in receivables that were due within 12 months. So its liabilities total US$264.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$143.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Rex International Holding would likely require a major re-capitalisation if it had to pay its creditors today. Rex International Holding boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Importantly, Rex International Holding's EBIT fell a jaw-dropping 80% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rex International Holding 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Rex International Holding 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. Over the last two years, Rex International Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Rex International Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$47.1m. The cherry on top was that in converted 222% of that EBIT to free cash flow, bringing in US$88m. Despite the cash, we do find Rex International Holding's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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 3 warning signs for Rex International Holding you should be aware of, and 1 of them shouldn't be ignored.

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.