Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Radius Recycling, Inc. (NASDAQ:RDUS) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Radius Recycling's Debt?
You can click the graphic below for the historical numbers, but it shows that as of May 2024 Radius Recycling had US$402.3m of debt, an increase on US$350.8m, over one year. However, it also had US$26.2m in cash, and so its net debt is US$376.1m.
How Strong Is Radius Recycling's Balance Sheet?
According to the last reported balance sheet, Radius Recycling had liabilities of US$311.4m due within 12 months, and liabilities of US$595.5m due beyond 12 months. Offsetting this, it had US$26.2m in cash and US$208.9m in receivables that were due within 12 months. So it has liabilities totalling US$671.8m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the US$427.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Radius Recycling would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Radius Recycling'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.
Over 12 months, Radius Recycling made a loss at the EBIT level, and saw its revenue drop to US$2.7b, which is a fall of 12%. We would much prefer see growth.
Caveat Emptor
Not only did Radius Recycling's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$79m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$6.9m over the last twelve months. So suffice it to say we consider the stock to be risky. 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 - Radius Recycling has 2 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.