Here's Why Mont Royal Resources (ASX:MRZ) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Mont Royal Resources Limited (ASX:MRZ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Mont Royal Resources's Net Debt?

As you can see below, at the end of July 2025, Mont Royal Resources had CA$2.14m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has CA$652.5k in cash leading to net debt of about CA$1.48m.

How Healthy Is Mont Royal Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mont Royal Resources had liabilities of CA$3.45m due within 12 months and liabilities of CA$27.8k due beyond that. Offsetting these obligations, it had cash of CA$652.5k as well as receivables valued at CA$32.2k due within 12 months. So its liabilities total CA$2.80m more than the combination of its cash and short-term receivables.

Since publicly traded Mont Royal Resources shares are worth a total of CA$60.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mont Royal 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.

View our latest analysis for Mont Royal Resources

Given its lack of meaningful operating revenue, investors are probably hoping that Mont Royal Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Mont Royal Resources produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$3.7m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$7.4m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 5 warning signs for Mont Royal Resources (4 are concerning!) that you should be aware of before investing here.

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.

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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.