Health Check: How Prudently Does Inca One Gold (CVE:IO) Use 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Inca One Gold Corp. (CVE:IO) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Inca One Gold

What Is Inca One Gold's Net Debt?

The image below, which you can click on for greater detail, shows that Inca One Gold had debt of US$6.47m at the end of October 2020, a reduction from US$7.63m over a year. On the flip side, it has US$512.1k in cash leading to net debt of about US$5.96m.

How Strong Is Inca One Gold's Balance Sheet?

We can see from the most recent balance sheet that Inca One Gold had liabilities of US$7.39m falling due within a year, and liabilities of US$6.94m due beyond that. Offsetting this, it had US$512.1k in cash and US$1.44m in receivables that were due within 12 months. So it has liabilities totalling US$12.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$13.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Inca One Gold can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Inca One Gold made a loss at the EBIT level, and saw its revenue drop to US$27m, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Inca One Gold's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$2.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 US$833k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 5 warning signs for Inca One Gold you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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