RCM Technologies (NASDAQ:RCMT) Is Making Moderate Use Of Debt

Simply Wall St
November 15, 2021
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, RCM Technologies, Inc. (NASDAQ:RCMT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for RCM Technologies

What Is RCM Technologies's Debt?

The image below, which you can click on for greater detail, shows that RCM Technologies had debt of US$7.96m at the end of October 2021, a reduction from US$13.3m over a year. However, it also had US$2.82m in cash, and so its net debt is US$5.14m.

NasdaqGM:RCMT Debt to Equity History November 16th 2021

How Healthy Is RCM Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RCM Technologies had liabilities of US$33.7m due within 12 months and liabilities of US$12.0m due beyond that. On the other hand, it had cash of US$2.82m and US$43.2m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that RCM Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$72.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Over 12 months, RCM Technologies reported revenue of US$180m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months RCM Technologies produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.3m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. And the cherry on top is that its actual free cash flow was US$5.7m with statutory profit coming in at US$3.3m. This one is a bit too risky for our liking. 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 instance, we've identified 3 warning signs for RCM Technologies that 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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