Is RCM Technologies (NASDAQ:RCMT) Using Too Much Debt?

Warren Buffett famously said, '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, RCM Technologies, Inc. (NASDAQ:RCMT) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for RCM Technologies

What Is RCM Technologies's Debt?

As you can see below, RCM Technologies had US$11.9m of debt at January 2021, down from US$34.8m a year prior. On the flip side, it has US$734.0k in cash leading to net debt of about US$11.2m.

How Healthy Is RCM Technologies' Balance Sheet?

According to the last reported balance sheet, RCM Technologies had liabilities of US$28.7m due within 12 months, and liabilities of US$17.4m due beyond 12 months. Offsetting this, it had US$734.0k in cash and US$38.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.87m.

Since publicly traded RCM Technologies shares are worth a total of US$39.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, 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 RCM Technologies'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.

In the last year RCM Technologies had a loss before interest and tax, and actually shrunk its revenue by 21%, to US$150m. To be frank that doesn't bode well.

Caveat Emptor

Not only did RCM Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$7.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$8.9m. In the meantime, we consider the stock very risky. 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 - RCM Technologies has 4 warning signs we think you should be aware of.

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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