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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.’ 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. Importantly, Reliv’ International, Inc. (NASDAQ:RELV) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. 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.
How Much Debt Does Reliv’ International Carry?
As you can see below, Reliv’ International had US$500.0k of debt at March 2019, down from US$2.94m a year prior. But on the other hand it also has US$2.38m in cash, leading to a US$1.88m net cash position.
How Strong Is Reliv’ International’s Balance Sheet?
We can see from the most recent balance sheet that Reliv’ International had liabilities of US$4.83m falling due within a year, and liabilities of US$642.5k due beyond that. Offsetting these obligations, it had cash of US$2.38m as well as receivables valued at US$525.6k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.56m.
While this might seem like a lot, it is not so bad since Reliv’ International has a market capitalization of US$7.71m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Given that Reliv’ International has more cash than debt, we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Reliv’ International’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Reliv’ International actually shrunk its revenue by 8.7%, to US$36m. That’s not what we would hope to see.
So How Risky Is Reliv’ International?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Reliv’ International had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$2.0m and booked a US$1.0m accounting loss. But at least it has US$2.4m 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. For riskier companies like Reliv’ International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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