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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 can see that Riverstone Holdings Limited (SGX:AP4) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Riverstone Holdings
What Is Riverstone Holdings's Debt?
As you can see below, Riverstone Holdings had RM16.0m of debt at June 2019, down from RM22.0m a year prior. But on the other hand it also has RM92.4m in cash, leading to a RM76.4m net cash position.
How Healthy Is Riverstone Holdings's Balance Sheet?
The latest balance sheet data shows that Riverstone Holdings had liabilities of RM112.8m due within a year, and liabilities of RM21.2m falling due after that. Offsetting this, it had RM92.4m in cash and RM147.0m in receivables that were due within 12 months. So it actually has RM105.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Riverstone Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Riverstone Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
While Riverstone Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Riverstone Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Riverstone Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Riverstone Holdings's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.