Does Retractable Technologies (NYSEMKT:RVP) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Retractable Technologies, Inc. (NYSEMKT:RVP) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Retractable Technologies

What Is Retractable Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Retractable Technologies had US$3.79m of debt, an increase on US$2.73m, over one year. But on the other hand it also has US$22.4m in cash, leading to a US$18.6m net cash position.

A Look At Retractable Technologies's Liabilities

Zooming in on the latest balance sheet data, we can see that Retractable Technologies had liabilities of US$14.8m due within 12 months and liabilities of US$13.2m due beyond that. Offsetting this, it had US$22.4m in cash and US$16.0m in receivables that were due within 12 months. So it actually has US$10.3m more liquid assets than total liabilities.

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

Even more impressive was the fact that Retractable Technologies grew its EBIT by 1,785% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Retractable Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Retractable Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, Retractable Technologies basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing up

While it is always sensible to investigate a company's debt, in this case Retractable Technologies has US$18.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,785% over the last year. So we don't think Retractable Technologies's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Retractable Technologies (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.
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