Is Inter-Rock Minerals (CVE:IRO) Using Too Much Debt?

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.' 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 Inter-Rock Minerals Inc. (CVE:IRO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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.

View our latest analysis for Inter-Rock Minerals

What Is Inter-Rock Minerals's Net Debt?

As you can see below, Inter-Rock Minerals had US$3.84m of debt at June 2023, down from US$4.11m a year prior. But on the other hand it also has US$4.61m in cash, leading to a US$773.0k net cash position.

How Strong Is Inter-Rock Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inter-Rock Minerals had liabilities of US$7.50m due within 12 months and liabilities of US$4.50m due beyond that. On the other hand, it had cash of US$4.61m and US$7.57m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Inter-Rock Minerals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$11.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Inter-Rock Minerals boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Inter-Rock Minerals grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inter-Rock Minerals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Inter-Rock Minerals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Inter-Rock Minerals produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Inter-Rock Minerals has US$773.0k in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% year-on-year EBIT growth. So is Inter-Rock Minerals's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Inter-Rock Minerals you should be aware of, and 1 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.