Yahoo Finance Is Resources Connection (NASDAQ:RGP) A Risky Investment?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Resources Connection, Inc. (NASDAQ:RGP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, 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.
Check out our latest analysis for Resources Connection
What Is Resources Connection's Debt?
As you can see below, Resources Connection had US$54.0m of debt, at February 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$82.2m in cash, leading to a US$28.2m net cash position.
How Strong Is Resources Connection's Balance Sheet?
According to the last reported balance sheet, Resources Connection had liabilities of US$115.6m due within 12 months, and liabilities of US$87.1m due beyond 12 months. Offsetting this, it had US$82.2m in cash and US$187.7m in receivables that were due within 12 months. So it can boast US$67.2m more liquid assets than total liabilities.
This surplus suggests that Resources Connection has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Resources Connection has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Resources Connection grew its EBIT by 131% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Resources Connection'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Resources Connection 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. During the last three years, Resources Connection generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Resources Connection has net cash of US$28.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$24m, being 89% of its EBIT. So we don't think Resources Connection's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Resources Connection you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
