Is Tolu Minerals (ASX:TOK) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tolu Minerals Limited (ASX:TOK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Tolu Minerals Carry?

As you can see below, Tolu Minerals had AU$4.65m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But it also has AU$21.6m in cash to offset that, meaning it has AU$16.9m net cash.

A Look At Tolu Minerals' Liabilities

We can see from the most recent balance sheet that Tolu Minerals had liabilities of AU$5.21m falling due within a year, and liabilities of AU$5.42m due beyond that. Offsetting these obligations, it had cash of AU$21.6m as well as receivables valued at AU$2.76m due within 12 months. So it actually has AU$13.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Tolu Minerals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tolu Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tolu Minerals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

See our latest analysis for Tolu Minerals

Since Tolu Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Tolu Minerals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Tolu Minerals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$41m and booked a AU$11m accounting loss. Given it only has net cash of AU$16.9m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Tolu Minerals is showing 4 warning signs in our investment analysis , and 3 of those don't sit too well with us...

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.