We Think Rex International Holding (SGX:5WH) Is Taking Some Risk With Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Rex International Holding Limited ( SGX:5WH ) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rex International Holding

What Is Rex International Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Rex International Holding had US$79.8m of debt in June 2024, down from US$112.1m, one year before. However, it does have US$107.3m in cash offsetting this, leading to net cash of US$27.4m.

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$157.4m due within 12 months and liabilities of US$345.4m due beyond that. Offsetting this, it had US$107.3m in cash and US$49.7m in receivables that were due within 12 months. So it has liabilities totalling US$345.8m more than its cash and near-term receivables, combined. Reader should note that the long-term liabilities include a decommission provision of USD$206 million, leading to a more favorable net position. Additionally, the long-term liabilities include deferred tax amounts that will remain contingent on future revenue generation.

This deficit presents a challenge for the US$117.2 million company, and it's important for shareholders to monitor the situation closely. While Rex International Holding might require a major re-capitalisation if it had to pay its creditors today, the fact that it has more cash than debt provides a level of reassurance. We're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, Rex International Holding's EBIT launched higher than Elon Musk, gaining a whopping 454% on last year. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Rex International Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$27.4m. And it impressed us with free cash flow of US$85m, being 185% of its EBIT. So while Rex International Holding does not have a great balance sheet, it's certainly not too bad. Given our hesitation about the stock, it would be good to know if Rex International Holding insiders have sold any shares recently. You click here to find out if insiders have sold recently .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks , today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.