We Think Inter-Rock Minerals (CVE:IRO) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. 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?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Inter-Rock Minerals

How Much Debt Does Inter-Rock Minerals Carry?

As you can see below, at the end of March 2024, Inter-Rock Minerals had US$4.46m of debt, up from US$3.43m a year ago. Click the image for more detail. But on the other hand it also has US$5.25m in cash, leading to a US$792.0k net cash position.

How Healthy Is Inter-Rock Minerals' Balance Sheet?

According to the last reported balance sheet, Inter-Rock Minerals had liabilities of US$10.00m due within 12 months, and liabilities of US$4.98m due beyond 12 months. On the other hand, it had cash of US$5.25m and US$10.8m worth of receivables due within a year. So it actually has US$1.07m 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. Succinctly put, Inter-Rock Minerals boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Inter-Rock Minerals's load is not too heavy, because its EBIT was down 30% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Inter-Rock Minerals'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.

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. Over the most recent three years, Inter-Rock Minerals recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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$792.0k in net cash and a decent-looking balance sheet. So we don't have any problem with Inter-Rock Minerals's use of debt. 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. We've identified 3 warning signs with Inter-Rock Minerals , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com