Is ROK Resources (CVE:ROK) Using Too Much 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.' 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 can see that ROK Resources Inc. (CVE:ROK) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ROK Resources

What Is ROK Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 ROK Resources had CA$3.38m of debt, an increase on none, over one year. However, because it has a cash reserve of CA$1.75m, its net debt is less, at about CA$1.63m.

How Healthy Is ROK Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ROK Resources had liabilities of CA$1.60m due within 12 months and liabilities of CA$6.27m due beyond that. Offsetting this, it had CA$1.75m in cash and CA$776.0k in receivables that were due within 12 months. So its liabilities total CA$5.33m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because ROK Resources is worth CA$17.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is ROK 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.

While it hasn't made a profit, at least ROK Resources booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months ROK Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$1.5m at the EBIT level. 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$5.6m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with ROK Resources , and understanding them should be part of your investment process.

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.
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