Is RLX Technology (NYSE:RLX) A Risky Investment?

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. As with many other companies RLX Technology Inc. (NYSE:RLX) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for RLX Technology

What Is RLX Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 RLX Technology had CN¥41.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥8.11b in cash, so it actually has CN¥8.07b net cash.

A Look At RLX Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that RLX Technology had liabilities of CN¥668.7m due within 12 months and liabilities of CN¥48.0m due beyond that. Offsetting these obligations, it had cash of CN¥8.11b as well as receivables valued at CN¥643.0m due within 12 months. So it can boast CN¥8.04b more liquid assets than total liabilities.

This surplus liquidity suggests that RLX Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, RLX Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine RLX Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year RLX Technology had a loss before interest and tax, and actually shrunk its revenue by 76%, to CN¥1.2b. That makes us nervous, to say the least.

So How Risky Is RLX Technology?

Although RLX Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥534m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how RLX Technology's profit, revenue, and operating cashflow have changed over the last few years.

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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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.