Is Red Cat Holdings (NASDAQ:RCAT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Red Cat Holdings, Inc. (NASDAQ:RCAT) does have debt on its balance sheet. 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Red Cat Holdings

How Much Debt Does Red Cat Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of January 2022 Red Cat Holdings had US$2.51m of debt, an increase on US$2.41m, over one year. However, its balance sheet shows it holds US$55.6m in cash, so it actually has US$53.0m net cash.

A Look At Red Cat Holdings' Liabilities

We can see from the most recent balance sheet that Red Cat Holdings had liabilities of US$5.13m falling due within a year, and liabilities of US$1.91m due beyond that. Offsetting this, it had US$55.6m in cash and US$1.29m in receivables that were due within 12 months. So it can boast US$49.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Red Cat Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Red Cat Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Red Cat 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.

Over 12 months, Red Cat Holdings reported revenue of US$7.0m, which is a gain of 100%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Red Cat Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Red Cat 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$13m and booked a US$10m accounting loss. Given it only has net cash of US$53.0m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Red Cat Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example, we've discovered 3 warning signs for Red Cat Holdings (1 is concerning!) that you should be aware of before investing here.

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.