Rayonier Advanced Materials (NYSE:RYAM) 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 Rayonier Advanced Materials Inc. (NYSE:RYAM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rayonier Advanced Materials

How Much Debt Does Rayonier Advanced Materials Carry?

As you can see below, Rayonier Advanced Materials had US$926.6m of debt at December 2021, down from US$1.08b a year prior. However, because it has a cash reserve of US$291.8m, its net debt is less, at about US$634.8m.

How Healthy Is Rayonier Advanced Materials' Balance Sheet?

We can see from the most recent balance sheet that Rayonier Advanced Materials had liabilities of US$354.6m falling due within a year, and liabilities of US$1.28b due beyond that. Offsetting this, it had US$291.8m in cash and US$203.0m in receivables that were due within 12 months. So it has liabilities totalling US$1.14b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$373.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Rayonier Advanced Materials would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Rayonier Advanced Materials's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Rayonier Advanced Materials reported revenue of US$1.4b, which is a gain of 4.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Rayonier Advanced Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$5.9m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost US$50m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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 1 warning sign for Rayonier Advanced Materials you should know about.

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. 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.