Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies RTG Mining Inc. (TSE:RTG) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for RTG Mining
What is RTG Mining’s debt?
The graph below, which you can click on for more details, shows that RTG Mining had debt of US$1.50 million in December 2021; about the same as the previous year. But he also has $10.0 million in cash to offset that, which means he has $8.55 million in net cash.
How healthy is RTG Mining’s balance sheet?
The latest balance sheet data shows that RTG Mining had liabilities of $3.65 million due within the year, and liabilities of $15.3k due thereafter. On the other hand, it had cash of $10.0 million and $55.0 k of receivables due within one year. He can therefore boast of having $6.43 million in cash more than total Passives.
This surplus suggests that RTG Mining has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that RTG Mining has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of RTG Mining that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Since RTG Mining does not have significant operating revenue, shareholders are likely hoping it will develop a new mine of value before too long.
So, how risky is RTG Mining?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And we note that RTG Mining recorded a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of US$3.2 million and recorded a book loss of US$6.8 million. With just $8.55 million on the balance sheet, it looks like it will soon have to raise capital again. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, RTG Mining has 4 warning signs (and 1 which is significant) that we think you should know about.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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