Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is RTG Mining's Debt?
The chart below, which you can click on for greater detail, shows that RTG Mining had US$1.50m in debt in December 2021; about the same as the year before. But it also has US$10.0m in cash to offset that, meaning it has US$8.55m net cash.
How Healthy Is RTG Mining's Balance Sheet?
The latest balance sheet data shows that RTG Mining had liabilities of US$3.65m due within a year, and liabilities of US$15.3k falling due after that. On the other hand, it had cash of US$10.0m and US$55.0k worth of receivables due within a year. So it can boast US$6.43m more liquid assets than total liabilities.
This surplus suggests that RTG Mining has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that RTG Mining has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is RTG Mining's earnings that will influence how the balance sheet holds up in the future. 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?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that RTG Mining had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$3.2m and booked a US$6.8m accounting loss. With only US$8.55m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example RTG Mining has 4 warning signs (and 1 which is significant) we think you should know about.
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.