Does Torq Resources (CVE:TORQ) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Torq Resources Inc. (CVE:TORQ) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Torq Resources

What Is Torq Resources's Net Debt?

As you can see below, at the end of June 2023, Torq Resources had CA$2.12m of debt, up from none a year ago. Click the image for more detail. However, it does have CA$8.66m in cash offsetting this, leading to net cash of CA$6.55m.

A Look At Torq Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Torq Resources had liabilities of CA$1.45m due within 12 months and liabilities of CA$2.12m due beyond that. On the other hand, it had cash of CA$8.66m and CA$85.9k worth of receivables due within a year. So it can boast CA$5.18m more liquid assets than total liabilities.

This surplus suggests that Torq Resources is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Torq Resources has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Torq Resources 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Torq Resources finds some valuable resources, before it runs out of money.

So How Risky Is Torq Resources?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Torq Resources lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$15m and booked a CA$18m accounting loss. But the saving grace is the CA$6.55m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Torq Resources you should be aware of, and 3 of them can'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.