Stock Analysis

Is Range Resources (NYSE:RRC) Using Debt Sensibly?

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NYSE:RRC
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Range Resources Corporation (NYSE:RRC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Range Resources's Net Debt?

As you can see below, Range Resources had US$3.01b of debt at June 2021, down from US$3.22b a year prior. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
NYSE:RRC Debt to Equity History August 18th 2021

How Healthy Is Range Resources' Balance Sheet?

We can see from the most recent balance sheet that Range Resources had liabilities of US$925.9m falling due within a year, and liabilities of US$3.78b due beyond that. Offsetting this, it had US$464.0k in cash and US$299.6m in receivables that were due within 12 months. So it has liabilities totalling US$4.41b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$3.23b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Range Resources'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 Range Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$2.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Range Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$123m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$39m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should be aware of the 3 warning signs we've spotted with Range Resources .

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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