RF Industries (NASDAQ:RFIL) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that RF Industries, Ltd. (NASDAQ:RFIL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for RF Industries

How Much Debt Does RF Industries Carry?

The image below, which you can click on for greater detail, shows that at January 2021 RF Industries had debt of US$2.79m, up from none in one year. However, it does have US$15.5m in cash offsetting this, leading to net cash of US$12.7m.

How Strong Is RF Industries' Balance Sheet?

We can see from the most recent balance sheet that RF Industries had liabilities of US$7.32m falling due within a year, and liabilities of US$1.16m due beyond that. Offsetting these obligations, it had cash of US$15.5m as well as receivables valued at US$5.16m due within 12 months. So it can boast US$12.2m more liquid assets than total liabilities.

This excess liquidity suggests that RF Industries is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that RF Industries 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 future earnings, more than anything, that will determine RF Industries'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, RF Industries made a loss at the EBIT level, and saw its revenue drop to US$41m, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is RF Industries?

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 RF Industries 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$1.9m and booked a US$510k accounting loss. With only US$12.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example - RF Industries has 3 warning signs we think you should be aware of.

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. 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.
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