Robex Resources (CVE:RBX) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Robex Resources Inc. (CVE:RBX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Robex Resources

What Is Robex Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that Robex Resources had CA$7.96m of debt in September 2020, down from CA$23.5m, one year before. But it also has CA$9.41m in cash to offset that, meaning it has CA$1.45m net cash.

A Look At Robex Resources' Liabilities

We can see from the most recent balance sheet that Robex Resources had liabilities of CA$18.4m falling due within a year, and liabilities of CA$8.05m due beyond that. Offsetting these obligations, it had cash of CA$9.41m as well as receivables valued at CA$4.95m due within 12 months. So it has liabilities totalling CA$12.1m more than its cash and near-term receivables, combined.

Given Robex Resources has a market capitalization of CA$248.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Robex Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Robex Resources grew its EBIT by 469% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Robex Resources 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Robex Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Robex Resources recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Robex Resources has CA$1.45m in net cash. And it impressed us with free cash flow of CA$49m, being 90% of its EBIT. So we don't think Robex Resources's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Robex Resources that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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