Is Rogue Resources (CVE: RRS) weighed down by its debt?

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David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Rogue Resources Inc. (CVE: RRS) uses debt in his business. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.

See our latest review for Rogue Resources

What is Rogue Resources’ net debt?

The image below, which you can click for more details, shows that in April 2021, Rogue Resources was in debt of C $ 2.53 million, compared to C $ 2.23 million in one year. However, he also had CA $ 133.6K in cash, and therefore his net debt is CA $ 2.40M.

TSXV: RRS Debt to equity Historical September 26, 2021

A look at the liabilities of Rogue Resources

The latest balance sheet data shows that Rogue Resources had liabilities of C $ 3.03 million maturing within one year and liabilities of C $ 1.51 million maturing thereafter. On the other hand, he had cash of CA $ 133.6k and receivables valued at CA $ 192.8k within one year. Its liabilities therefore total C $ 4.21 million more than the combination of its cash and short-term receivables.

When you consider that this deficit exceeds the company’s C $ 3.51 million market capitalization, you may well be inclined to take a close look at the balance sheet. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Rogue Resources will need revenue to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

Although it did not make a profit, at least Rogue Resources recorded its first income as a publicly traded company in the last twelve months.

Emptor Warning

It is important to note that Rogue Resources recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, he lost C $ 172,000 in EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. Notably because he had negative free cash flow of C $ 329,000 over the past twelve months. That means it’s on the risky side of things. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, Rogue Resources has 4 warning signs (and 1 which is a bit rude) we think you should be aware of.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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