Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Radius Recycling, Inc. (NASDAQ:RDUS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Radius Recycling Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 Radius Recycling had US$445.4m of debt, an increase on US$285.4m, over one year. However, because it has a cash reserve of US$15.2m, its net debt is less, at about US$430.2m.

How Strong Is Radius Recycling's Balance Sheet?

We can see from the most recent balance sheet that Radius Recycling had liabilities of US$291.7m falling due within a year, and liabilities of US$636.2m due beyond that. Offsetting this, it had US$15.2m in cash and US$212.5m in receivables that were due within 12 months. So its liabilities total US$700.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$414.1m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Radius Recycling can strengthen its balance sheet over time. 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 7.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Radius Recycling had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$85m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$130m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Radius Recycling (of which 3 can't be ignored!) 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.