We Think Resources Connection (NASDAQ:RGP) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Resources Connection, Inc. (NASDAQ:RGP) does use debt in its business. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Resources Connection

How Much Debt Does Resources Connection Carry?

As you can see below, Resources Connection had US$54.0m of debt, at February 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$82.2m in cash, so it actually has US$28.2m net cash.

How Strong Is Resources Connection's Balance Sheet?

We can see from the most recent balance sheet that Resources Connection had liabilities of US$115.6m falling due within a year, and liabilities of US$87.1m due beyond that. On the other hand, it had cash of US$82.2m and US$187.7m worth of receivables due within a year. So it actually has US$67.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Resources Connection could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Resources Connection boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Resources Connection grew its EBIT by 131% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Resources Connection'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Resources Connection has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Resources Connection generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Resources Connection has net cash of US$28.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in US$24m. So is Resources Connection's debt a risk? It doesn't seem so to us. 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 - Resources Connection has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.