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.' 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 can see that Rogue Resources Inc. (CVE:RRS) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Rogue Resources's Net Debt?
The image below, which you can click on for greater detail, shows that at April 2021 Rogue Resources had debt of CA$2.53m, up from CA$2.23m in one year. However, it also had CA$133.6k in cash, and so its net debt is CA$2.40m.
A Look At Rogue Resources' Liabilities
The latest balance sheet data shows that Rogue Resources had liabilities of CA$3.03m due within a year, and liabilities of CA$1.51m falling due after that. On the other hand, it had cash of CA$133.6k and CA$192.8k worth of receivables due within a year. So its liabilities total CA$4.21m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's CA$3.51m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rogue 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.
While it hasn't made a profit, at least Rogue Resources booked its first revenue as a publicly listed company, in the last twelve months.
Importantly, Rogue Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$172k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CA$329k over the last twelve months. That means it's on the risky side of things. 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 Rogue Resources has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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. 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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