These 4 Measures Indicate That Inter-Rock Minerals (CVE:IRO) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Inter-Rock Minerals Inc. (CVE:IRO) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Inter-Rock Minerals

How Much Debt Does Inter-Rock Minerals Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Inter-Rock Minerals had debt of US$4.51m, up from US$3.84m in one year. However, its balance sheet shows it holds US$6.16m in cash, so it actually has US$1.65m net cash.

How Healthy 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$9.07m due within 12 months and liabilities of US$5.11m due beyond that. On the other hand, it had cash of US$6.16m and US$9.14m worth of receivables due within a year. So it can boast US$1.12m more liquid assets than total liabilities.

This short term liquidity is a sign that Inter-Rock Minerals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Inter-Rock Minerals has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Inter-Rock Minerals grew its EBIT at 12% over the last year, further increasing its ability to manage 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Inter-Rock Minerals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Inter-Rock Minerals's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Inter-Rock Minerals has net cash of US$1.65m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we don't think Inter-Rock Minerals's use of debt is 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. For example, we've discovered 3 warning signs for Inter-Rock Minerals (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.