Is Ranpak Holdings (NYSE:PACK) Weighed On By Its Debt Load?

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.' 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. We can see that Ranpak Holdings Corp. (NYSE:PACK) does use debt in its business. But is this debt a concern to shareholders?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ranpak Holdings

What Is Ranpak Holdings's Debt?

As you can see below, Ranpak Holdings had US$394.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$65.1m in cash offsetting this, leading to net debt of about US$329.0m.

How Strong Is Ranpak Holdings' Balance Sheet?

We can see from the most recent balance sheet that Ranpak Holdings had liabilities of US$58.6m falling due within a year, and liabilities of US$495.2m due beyond that. On the other hand, it had cash of US$65.1m and US$44.0m worth of receivables due within a year. So it has liabilities totalling US$444.7m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$526.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ranpak Holdings 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.

In the last year Ranpak Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to US$345m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Ranpak Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$15m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Ranpak Holdings you should be aware of.

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.