Is Rafael Holdings (NYSE:RFL) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Rafael Holdings, Inc. (NYSE:RFL) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Rafael Holdings

What Is Rafael Holdings's Net Debt?

As you can see below, at the end of October 2021, Rafael Holdings had US$14.7m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$72.4m in cash, leading to a US$57.7m net cash position.

A Look At Rafael Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Rafael Holdings had liabilities of US$17.3m due within 12 months and liabilities of US$81.0k due beyond that. Offsetting these obligations, it had cash of US$72.4m as well as receivables valued at US$712.0k due within 12 months. So it actually has US$55.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Rafael Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Rafael Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Rafael Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Rafael Holdings made a loss at the EBIT level, and saw its revenue drop to US$3.9m, which is a fall of 17%. We would much prefer see growth.

So How Risky Is Rafael Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Rafael Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$19m and booked a US$152m accounting loss. But at least it has US$57.7m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Rafael Holdings (of which 1 is potentially serious!) you should know about.

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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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.