Regional Express Holdings (ASX:REX) Has A Pretty Healthy Balance Sheet
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Regional Express Holdings Limited (ASX:REX) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Regional Express Holdings
What Is Regional Express Holdings's Debt?
The image below, which you can click on for greater detail, shows that Regional Express Holdings had debt of AU$4.91m at the end of December 2018, a reduction from AU$20.1m over a year. But it also has AU$17.6m in cash to offset that, meaning it has AU$12.7m net cash.
How Healthy Is Regional Express Holdings's Balance Sheet?
The latest balance sheet data shows that Regional Express Holdings had liabilities of AU$56.2m due within a year, and liabilities of AU$8.09m falling due after that. Offsetting these obligations, it had cash of AU$17.6m as well as receivables valued at AU$12.0m due within 12 months. So it has liabilities totalling AU$34.7m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Regional Express Holdings is worth AU$150.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Regional Express Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Regional Express Holdings has increased its EBIT by 4.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Regional Express Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Regional Express Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Regional Express Holdings recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While Regional Express Holdings does have more liabilities than liquid assets, it also has net cash of AU$13m. So we don't have any problem with Regional Express Holdings's use of debt. Given Regional Express Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
