Rex International Holding (SGX:5WH) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Rex International Holding Limited (SGX:5WH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Rex International Holding

What Is Rex International Holding's Net Debt?

As you can see below, at the end of December 2021, Rex International Holding had US$55.6m of debt, up from US$18.0m a year ago. Click the image for more detail. However, it does have US$87.1m in cash offsetting this, leading to net cash of US$31.5m.

How Strong Is Rex International Holding's Balance Sheet?

According to the last reported balance sheet, Rex International Holding had liabilities of US$58.7m due within 12 months, and liabilities of US$285.2m due beyond 12 months. On the other hand, it had cash of US$87.1m and US$92.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$164.5m.

This deficit is considerable relative to its market capitalization of US$258.4m, so it does suggest shareholders should keep an eye on Rex International Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Rex International Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Rex International Holding made a loss at the EBIT level, last year, it was also good to see that it generated US$54m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Rex International Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Rex International Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Rex International Holding actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Rex International Holding does have more liabilities than liquid assets, it also has net cash of US$31.5m. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in US$56m. So we don't have any problem with Rex International Holding's use of debt. 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 Rex International Holding has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.