Is Richmond International Travel & ToursLtd (GTSM:2743) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Richmond International Travel & Tours Co.,Ltd (GTSM:2743) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 it also has NT$480.4m in cash to offset that, meaning it has NT$380.4m net cash.

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

Zooming in on the latest balance sheet data, we can see that Richmond International Travel & ToursLtd had liabilities of NT$336.7m due within 12 months and liabilities of NT$36.7m due beyond that. On the other hand, it had cash of NT$480.4m and NT$47.4m worth of receivables due within a year. So it actually has 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! There's no doubt that we learn most about debt from the balance sheet. But it is Richmond International Travel & ToursLtd's earnings that will influence how the balance sheet holds up in the future. 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. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Richmond International Travel & ToursLtd has 4 warning signs (and 1 which shouldn't be ignored) 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. 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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