Yahoo Finance Iconic Minerals (CVE:ICM) Is Making Moderate Use Of Debt
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Iconic Minerals Ltd. (CVE:ICM) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Iconic Minerals
How Much Debt Does Iconic Minerals Carry?
As you can see below, Iconic Minerals had CA$2.11m of debt at May 2019, down from CA$2.21m a year prior. However, it also had CA$105.9k in cash, and so its net debt is CA$2.01m.
How Strong Is Iconic Minerals's Balance Sheet?
According to the last reported balance sheet, Iconic Minerals had liabilities of CA$2.60m due within 12 months, and liabilities of CA$2.03m due beyond 12 months. On the other hand, it had cash of CA$105.9k and CA$11.6k worth of receivables due within a year. So its liabilities total CA$4.52m more than the combination of its cash and short-term receivables.
Iconic Minerals has a market capitalization of CA$8.06m, so it could very likely raise cash to ameliorate 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 Iconic Minerals 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 Iconic Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Over the last twelve months Iconic Minerals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$394k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$407k of cash over the last year. 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 Iconic Minerals insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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