Is ROK Resources (CVE:ROK) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies ROK Resources Inc. (CVE:ROK) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ROK Resources

What Is ROK Resources's Net Debt?

The image below, which you can click on for greater detail, shows that ROK Resources had debt of CA$12.6m at the end of September 2023, a reduction from CA$42.2m over a year. On the flip side, it has CA$5.84m in cash leading to net debt of about CA$6.76m.

How Healthy Is ROK Resources' Balance Sheet?

The latest balance sheet data shows that ROK Resources had liabilities of CA$14.8m due within a year, and liabilities of CA$48.2m falling due after that. Offsetting this, it had CA$5.84m in cash and CA$12.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$44.5m.

This deficit is considerable relative to its market capitalization of CA$69.9m, so it does suggest shareholders should keep an eye on ROK Resources' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ROK Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ROK Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to CA$84m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though ROK Resources managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CA$3.9m. 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. For example, we would not want to see a repeat of last year's loss of CA$13m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that ROK Resources is showing 2 warning signs in our investment analysis , you should know about...

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.