Is Reward Minerals (ASX:RWD) Using Debt Sensibly?

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. Importantly, Reward Minerals Ltd (ASX:RWD) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Reward Minerals

How Much Debt Does Reward Minerals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Reward Minerals had AU$2.48m of debt, an increase on AU$1.38m, over one year. But on the other hand it also has AU$3.16m in cash, leading to a AU$680.4k net cash position.

How Strong Is Reward Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Reward Minerals had liabilities of AU$3.36m due within 12 months and liabilities of AU$121.7k due beyond that. Offsetting these obligations, it had cash of AU$3.16m as well as receivables valued at AU$59.2k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$264.0k.

Having regard to Reward Minerals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$17.6m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Reward Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Reward Minerals'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 it has no significant operating revenue at the moment, shareholders will be hoping Reward Minerals can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Reward Minerals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Reward Minerals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$2.6m of cash and made a loss of AU$636k. With only AU$680.4k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should learn about the 4 warning signs we've spotted with Reward Minerals (including 2 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.