Is Rex Trueform Group (JSE:RTN) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Rex Trueform Group Limited (JSE:RTN) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Rex Trueform Group

What Is Rex Trueform Group's Debt?

As you can see below, Rex Trueform Group had R78.6m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds R99.1m in cash, so it actually has R20.4m net cash.

How Strong Is Rex Trueform Group's Balance Sheet?

We can see from the most recent balance sheet that Rex Trueform Group had liabilities of R135.3m falling due within a year, and liabilities of R379.3m due beyond that. On the other hand, it had cash of R99.1m and R25.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R390.4m.

This deficit casts a shadow over the R260.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Rex Trueform Group would likely require a major re-capitalisation if it had to pay its creditors today. Given that Rex Trueform Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is Rex Trueform Group'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.

Over 12 months, Rex Trueform Group made a loss at the EBIT level, and saw its revenue drop to R436m, which is a fall of 38%. To be frank that doesn't bode well.

So How Risky Is Rex Trueform Group?

While Rex Trueform Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow R74m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. To that end, you should learn about the 3 warning signs we've spotted with Rex Trueform Group (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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