Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Redflex Holdings Limited (ASX:RDF) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Redflex Holdings
How Much Debt Does Redflex Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Redflex Holdings had AU$19.2m of debt, an increase on AU$5.88m, over one year. However, it does have AU$22.3m in cash offsetting this, leading to net cash of AU$3.09m.
A Look At Redflex Holdings's Liabilities
According to the last reported balance sheet, Redflex Holdings had liabilities of AU$31.8m due within 12 months, and liabilities of AU$34.3m due beyond 12 months. On the other hand, it had cash of AU$22.3m and AU$26.6m worth of receivables due within a year. So its liabilities total AU$17.2m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Redflex Holdings is worth AU$57.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Redflex Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Redflex Holdings'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.
In the last year Redflex Holdings had a loss before interest and tax, and actually shrunk its revenue by 14%, to AU$101m. We would much prefer see growth.