Is Rockwell Medical (NASDAQ:RMTI) 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 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. As with many other companies Rockwell Medical, Inc. (NASDAQ:RMTI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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

View our latest analysis for Rockwell Medical

How Much Debt Does Rockwell Medical Carry?

The image below, which you can click on for greater detail, shows that Rockwell Medical had debt of US$9.45m at the end of September 2023, a reduction from US$15.1m over a year. However, it does have US$11.7m in cash offsetting this, leading to net cash of US$2.28m.

A Look At Rockwell Medical's Liabilities

The latest balance sheet data shows that Rockwell Medical had liabilities of US$21.4m due within a year, and liabilities of US$9.68m falling due after that. Offsetting these obligations, it had cash of US$11.7m as well as receivables valued at US$9.36m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.00m.

While this might seem like a lot, it is not so bad since Rockwell Medical has a market capitalization of US$35.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Rockwell Medical also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rockwell Medical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Rockwell Medical reported revenue of US$81m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Rockwell Medical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Rockwell Medical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$10m of cash and made a loss of US$9.3m. But at least it has US$2.28m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Rockwell Medical (2 are significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.