Is Oceanic Iron Ore (CVE:FEO) A Risky Investment?

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.' 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. We note that Oceanic Iron Ore Corp. (CVE:FEO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Oceanic Iron Ore

How Much Debt Does Oceanic Iron Ore Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Oceanic Iron Ore had CA$6.68m of debt, an increase on CA$2.28m, over one year. However, it does have CA$575.6k in cash offsetting this, leading to net debt of about CA$6.10m.

A Look At Oceanic Iron Ore's Liabilities

We can see from the most recent balance sheet that Oceanic Iron Ore had liabilities of CA$676.0k falling due within a year, and liabilities of CA$7.15m due beyond that. Offsetting this, it had CA$575.6k in cash and CA$6.2k in receivables that were due within 12 months. So it has liabilities totalling CA$7.24m more than its cash and near-term receivables, combined.

Oceanic Iron Ore has a market capitalization of CA$12.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Oceanic Iron Ore 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 Oceanic Iron Ore has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Oceanic Iron Ore produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$691k. 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. However, it doesn't help that it burned through CA$843k of cash over the last year. So in short it's a really risky stock. 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. Be aware that Oceanic Iron Ore is showing 5 warning signs in our investment analysis , and 4 of those shouldn't be ignored...

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.
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