Here's Why Oceanic Iron Ore (CVE:FEO) Can Afford Some 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Oceanic Iron Ore Corp. (CVE:FEO) makes use of debt. But the more important question is: how much risk is that debt creating?

Our free stock report includes 4 warning signs investors should be aware of before investing in Oceanic Iron Ore. Read for free now.

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Oceanic Iron Ore's Debt?

As you can see below, at the end of December 2024, Oceanic Iron Ore had CA$9.13m of debt, up from CA$3.45m a year ago. Click the image for more detail. However, it does have CA$1.42m in cash offsetting this, leading to net debt of about CA$7.70m.

How Strong Is Oceanic Iron Ore's Balance Sheet?

According to the last reported balance sheet, Oceanic Iron Ore had liabilities of CA$9.85m due within 12 months, and liabilities of CA$416.3k due beyond 12 months. Offsetting these obligations, it had cash of CA$1.42m as well as receivables valued at CA$21.0k due within 12 months. So its liabilities total CA$8.82m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Oceanic Iron Ore has a market capitalization of CA$19.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Oceanic Iron Ore 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.

See our latest analysis for Oceanic Iron Ore

Given its lack of meaningful operating revenue, investors are probably hoping that Oceanic Iron Ore finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Oceanic Iron Ore had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$672k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$1.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Oceanic Iron Ore (2 are a bit unpleasant!) that you should be aware of before investing here.

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.