Is Inca One Gold (CVE:IO) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Inca One Gold Corp. (CVE:IO) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Inca One Gold

What Is Inca One Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that Inca One Gold had US$6.63m of debt in July 2020, down from US$7.58m, one year before. However, it also had US$3.10m in cash, and so its net debt is US$3.53m.

A Look At Inca One Gold's Liabilities

We can see from the most recent balance sheet that Inca One Gold had liabilities of US$3.47m falling due within a year, and liabilities of US$7.96m due beyond that. Offsetting this, it had US$3.10m in cash and US$684.6k in receivables that were due within 12 months. So its liabilities total US$7.65m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$12.6m. 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 it is future earnings, more than anything, that will determine Inca One Gold's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Inca One Gold had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to US$32m. We would much prefer see growth.

Caveat Emptor

Importantly, Inca One Gold had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$2.4m 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. We would feel better if it turned its trailing twelve month loss of US$2.1m into a profit. So to be blunt we do think it is 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Inca One Gold you should know about.

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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