Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • AUD/USD

    0.6517
    -0.0019 (-0.29%)
     
  • OIL

    82.57
    +1.22 (+1.50%)
     
  • GOLD

    2,234.10
    +21.40 (+0.97%)
     
  • Bitcoin AUD

    109,748.72
    +2,336.49 (+2.18%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • AUD/EUR

    0.6034
    +0.0004 (+0.06%)
     
  • AUD/NZD

    1.0899
    +0.0019 (+0.17%)
     
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NASDAQ

    18,277.03
    -3.81 (-0.02%)
     
  • FTSE

    7,969.68
    +37.70 (+0.48%)
     
  • Dow Jones

    39,746.56
    -13.52 (-0.03%)
     
  • DAX

    18,495.83
    +18.74 (+0.10%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     

Is Resource Development Group (ASX:RDG) Weighed On By Its Debt Load?

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 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 note that Resource Development Group Limited (ASX:RDG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

ADVERTISEMENT

Check out our latest analysis for Resource Development Group

What Is Resource Development Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2019 Resource Development Group had AU$4.17m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$10.4m in cash, so it actually has AU$6.21m net cash.

ASX:RDG Historical Debt, March 4th 2020
ASX:RDG Historical Debt, March 4th 2020

How Healthy Is Resource Development Group's Balance Sheet?

According to the last reported balance sheet, Resource Development Group had liabilities of AU$7.19m due within 12 months, and liabilities of AU$3.12m due beyond 12 months. On the other hand, it had cash of AU$10.4m and AU$5.95m worth of receivables due within a year. So it can boast AU$6.03m more liquid assets than total liabilities.

This surplus liquidity suggests that Resource Development Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Resource Development Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Resource Development 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, Resource Development Group made a loss at the EBIT level, and saw its revenue drop to AU$30m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Resource Development Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Resource Development Group had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through AU$3.2m of cash and made a loss of AU$656k. While this does make the company a bit risky, it's important to remember it has net cash of AU$6.21m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Resource Development Group , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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. Thank you for reading.