Rey Resources (ASX:REY) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Rey Resources Limited (ASX:REY) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Rey Resources

What Is Rey Resources's Debt?

As you can see below, at the end of June 2021, Rey Resources had AU$10.4m of debt, up from AU$7.70m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Rey Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rey Resources had liabilities of AU$76.0k due within 12 months and liabilities of AU$13.7m due beyond that. On the other hand, it had cash of AU$36.0k and AU$47.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$13.7m.

Rey Resources has a market capitalization of AU$33.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Rey Resources'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.

Given its lack of meaningful operating revenue, Rey Resources shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Importantly, Rey Resources had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$382k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$1.1m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. 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 Rey Resources (of which 4 are concerning!) you should know about.

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.

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.

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