Red Violet (NASDAQ:RDVT) Has Debt But No Earnings; Should You Worry?

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 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, Red Violet, Inc. (NASDAQ:RDVT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Red Violet

What Is Red Violet's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Red Violet had US$2.15m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$12.4m in cash, so it actually has US$10.3m net cash.

How Strong Is Red Violet's Balance Sheet?

The latest balance sheet data shows that Red Violet had liabilities of US$4.75m due within a year, and liabilities of US$3.15m falling due after that. Offsetting these obligations, it had cash of US$12.4m as well as receivables valued at US$2.92m due within 12 months. So it actually has US$7.47m more liquid assets than total liabilities.

This short term liquidity is a sign that Red Violet could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Red Violet boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Red Violet'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, Red Violet reported revenue of US$35m, which is a gain of 33%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Red Violet?

While Red Violet lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$35k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 33% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Red Violet you should be aware of.

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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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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