Ranpak Holdings (NYSE:PACK) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Ranpak Holdings Corp. (NYSE:PACK) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ranpak Holdings

How Much Debt Does Ranpak Holdings Carry?

The chart below, which you can click on for greater detail, shows that Ranpak Holdings had US$394.9m in debt in March 2023; about the same as the year before. However, because it has a cash reserve of US$64.4m, its net debt is less, at about US$330.5m.

How Healthy Is Ranpak Holdings' Balance Sheet?

According to the last reported balance sheet, Ranpak Holdings had liabilities of US$42.9m due within 12 months, and liabilities of US$502.7m due beyond 12 months. Offsetting these obligations, it had cash of US$64.4m as well as receivables valued at US$39.6m due within 12 months. So it has liabilities totalling US$441.6m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$380.7m, we think shareholders really should watch Ranpak Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Ranpak Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ranpak Holdings had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$325m. That's not what we would hope to see.

Caveat Emptor

Not only did Ranpak Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$8.0m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$29m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Ranpak Holdings .

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.