Rathdowney Resources (CVE:RTH) Is Carrying A Fair Bit Of Debt
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. Importantly, Rathdowney Resources Ltd. (CVE:RTH) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Rathdowney Resources
What Is Rathdowney Resources's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Rathdowney Resources had debt of CA$1.21m, up from none in one year. However, it also had CA$162.4k in cash, and so its net debt is CA$1.04m.
How Strong Is Rathdowney Resources's Balance Sheet?
According to the last reported balance sheet, Rathdowney Resources had liabilities of CA$6.36m due within 12 months, and liabilities of CA$1.21m due beyond 12 months. Offsetting these obligations, it had cash of CA$162.4k as well as receivables valued at CA$103.8k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.30m.
This deficit isn't so bad because Rathdowney Resources is worth CA$16.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Rathdowney Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Rathdowney Resources finds some valuable resources, before it runs out of money.
Caveat Emptor
Over the last twelve months Rathdowney Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$3.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$1.5m of cash over the last year. So in short it's a really risky stock. For riskier companies like Rathdowney Resources I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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