David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies RTG Mining Inc. (TSE:RTG) makes use of debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is RTG Mining's Net Debt?
You can click the graphic below for the historical numbers, but it shows that RTG Mining had US$1.50m of debt in June 2021, down from US$2.65m, one year before. But it also has US$2.20m in cash to offset that, meaning it has US$704.0k net cash.
A Look At RTG Mining's Liabilities
According to the last reported balance sheet, RTG Mining had liabilities of US$2.47m due within 12 months, and liabilities of US$10.8k due beyond 12 months. Offsetting these obligations, it had cash of US$2.20m as well as receivables valued at US$15.4k due within 12 months. So its liabilities total US$257.7k more than the combination of its cash and short-term receivables.
This state of affairs indicates that RTG Mining's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$64.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, RTG Mining also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RTG Mining will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Since RTG Mining has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is RTG Mining?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that RTG Mining had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$3.7m of cash and made a loss of US$6.7m. With only US$704.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 5 warning signs for RTG Mining (3 can't be ignored!) that you should be aware of before investing here.
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.
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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