Does Oceanic Iron Ore (CVE:FEO) Have A Healthy Balance Sheet?
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.' 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 Oceanic Iron Ore Corp. (CVE:FEO) makes use of debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Oceanic Iron Ore
What Is Oceanic Iron Ore's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Oceanic Iron Ore had CA$3.86m of debt, an increase on CA$1.18m, over one year. However, it also had CA$1.28m in cash, and so its net debt is CA$2.58m.
A Look At Oceanic Iron Ore's Liabilities
Zooming in on the latest balance sheet data, we can see that Oceanic Iron Ore had liabilities of CA$963.1k due within 12 months and liabilities of CA$4.31m due beyond that. On the other hand, it had cash of CA$1.28m and CA$33.0k worth of receivables due within a year. So it has liabilities totalling CA$3.96m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Oceanic Iron Ore is worth CA$6.91m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Oceanic Iron Ore will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Since Oceanic Iron Ore has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Importantly, Oceanic Iron Ore had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at CA$541k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$668k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Oceanic Iron Ore insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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