Is Torq Resources (CVE:TORQ) A Risky Investment?

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, Torq Resources Inc. (CVE:TORQ) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Torq Resources

What Is Torq Resources's Debt?

As you can see below, at the end of March 2023, Torq Resources had CA$2.04m of debt, up from none a year ago. Click the image for more detail. However, it does have CA$14.3m in cash offsetting this, leading to net cash of CA$12.3m.

How Strong Is Torq Resources' Balance Sheet?

We can see from the most recent balance sheet that Torq Resources had liabilities of CA$2.08m falling due within a year, and liabilities of CA$2.04m due beyond that. On the other hand, it had cash of CA$14.3m and CA$82.6k worth of receivables due within a year. So it actually has CA$10.3m 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 you can't view debt in total isolation; since Torq 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.

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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Torq Resources had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$12m of cash and made a loss of CA$14m. While this does make the company a bit risky, it's important to remember it has net cash of CA$12.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Torq Resources (of which 3 are potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.