Is Rockwell Medical (NASDAQ:RMTI) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Rockwell Medical, Inc. (NASDAQ:RMTI) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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$8.85m at the end of September 2024, a reduction from US$9.45m over a year. However, its balance sheet shows it holds US$18.3m in cash, so it actually has US$9.42m net cash.

A Look At Rockwell Medical's Liabilities

We can see from the most recent balance sheet that Rockwell Medical had liabilities of US$14.2m falling due within a year, and liabilities of US$13.8m due beyond that. Offsetting these obligations, it had cash of US$18.3m as well as receivables valued at US$8.89m due within 12 months. So it has liabilities totalling US$791.0k more than its cash and near-term receivables, combined.

Having regard to Rockwell Medical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$57.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Rockwell Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Rockwell Medical improved its EBIT from a last year's loss to a positive US$580k. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Rockwell Medical 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. Over the last year, Rockwell Medical actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Rockwell Medical has US$9.42m in net cash. And it impressed us with free cash flow of US$2.6m, being 454% of its EBIT. So we are not troubled with Rockwell Medical's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Rockwell Medical (of which 1 doesn't sit too well with us!) you should know about.

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.