Is Inca One Gold Corp.’s (CVE:IO) Balance Sheet A Threat To Its Future?
Inca One Gold Corp. (CVE:IO) is a small-cap stock with a market capitalization of CA$10m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that IO is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into IO here.
Does IO produce enough cash relative to debt?
Over the past year, IO has reduced its debt from US$2.4m to US$1.5m , which also accounts for long term debt. With this debt payback, IO’s cash and short-term investments stands at US$70k for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of IO’s operating efficiency ratios such as ROA here.
Does IO’s liquid assets cover its short-term commitments?
Looking at IO’s US$2.8m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$3.5m, leading to a 1.26x current account ratio. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can IO service its debt comfortably?
With a debt-to-equity ratio of 49%, IO can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since IO is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although IO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around IO’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure IO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Inca One Gold to get a better picture of the small-cap by looking at:
Historical Performance: What has IO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
