Is Riverstone Holdings (SGX:AP4) Using Too Much Debt?

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.' 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. We can see that Riverstone Holdings Limited (SGX:AP4) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Riverstone Holdings

What Is Riverstone Holdings's Debt?

The image below, which you can click on for greater detail, shows that Riverstone Holdings had debt of RM7.00m at the end of December 2020, a reduction from RM13.0m over a year. However, it does have RM648.9m in cash offsetting this, leading to net cash of RM641.9m.

How Healthy Is Riverstone Holdings' Balance Sheet?

According to the last reported balance sheet, Riverstone Holdings had liabilities of RM281.9m due within 12 months, and liabilities of RM47.8m due beyond 12 months. Offsetting these obligations, it had cash of RM648.9m as well as receivables valued at RM321.1m due within 12 months. So it actually has RM640.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Riverstone Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Riverstone Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Riverstone Holdings grew its EBIT by 423% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Riverstone Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Riverstone Holdings 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 most recent three years, Riverstone Holdings recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Riverstone Holdings has net cash of RM641.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 423% over the last year. So is Riverstone Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Riverstone Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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