Health Check: How Prudently Does Richmond International Travel & ToursLtd (GTSM:2743) Use 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. Importantly, Richmond International Travel & Tours Co.,Ltd (GTSM:2743) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Richmond International Travel & ToursLtd

How Much Debt Does Richmond International Travel & ToursLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Richmond International Travel & ToursLtd had NT$100.0m of debt in September 2020, down from NT$150.0m, one year before. But on the other hand it also has NT$480.4m in cash, leading to a NT$380.4m net cash position.

How Strong Is Richmond International Travel & ToursLtd's Balance Sheet?

According to the last reported balance sheet, Richmond International Travel & ToursLtd had liabilities of NT$336.7m due within 12 months, and liabilities of NT$36.7m due beyond 12 months. On the other hand, it had cash of NT$480.4m and NT$47.4m worth of receivables due within a year. So it can boast NT$154.4m more liquid assets than total liabilities.

This excess liquidity suggests that Richmond International Travel & ToursLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Richmond International Travel & ToursLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Richmond International Travel & ToursLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Richmond International Travel & ToursLtd made a loss at the EBIT level, and saw its revenue drop to NT$2.1b, which is a fall of 58%. To be frank that doesn't bode well.

So How Risky Is Richmond International Travel & ToursLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Richmond International Travel & ToursLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$212m and booked a NT$43m accounting loss. With only NT$380.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 4 warning signs for Richmond International Travel & ToursLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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