Does Rafael Holdings (NYSE:RFL) 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.' 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 Rafael Holdings, Inc. (NYSE:RFL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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 Rafael Holdings

What Is Rafael Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at April 2024 Rafael Holdings had debt of US$2.39m, up from none in one year. However, its balance sheet shows it holds US$7.44m in cash, so it actually has US$5.05m net cash.

A Look At Rafael Holdings' Liabilities

The latest balance sheet data shows that Rafael Holdings had liabilities of US$7.54m due within a year, and liabilities of US$3.52m falling due after that. Offsetting this, it had US$7.44m in cash and US$984.0k in receivables that were due within 12 months. So it has liabilities totalling US$2.64m more than its cash and near-term receivables, combined.

Since publicly traded Rafael Holdings shares are worth a total of US$52.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Rafael Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Rafael Holdings'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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Rafael Holdings can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Rafael Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Rafael Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$6.2m and booked a US$29m accounting loss. However, it has net cash of US$5.05m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Rafael Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 4 warning signs for Rafael Holdings you should be aware of, and 3 of them are significant.

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.