Yahoo Finance Inca One Gold (CVE:IO) Has Debt But No Earnings; Should You Worry?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Inca One Gold Corp. (CVE:IO) does have debt on its balance sheet. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Inca One Gold
What Is Inca One Gold's Debt?
The image below, which you can click on for greater detail, shows that at January 2019 Inca One Gold had debt of US$8.19m, up from US$2.39m in one year. However, it also had US$1.67m in cash, and so its net debt is US$6.52m.
A Look At Inca One Gold's Liabilities
We can see from the most recent balance sheet that Inca One Gold had liabilities of US$5.09m falling due within a year, and liabilities of US$8.52m due beyond that. On the other hand, it had cash of US$1.67m and US$2.06m worth of receivables due within a year. So its liabilities total US$9.89m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of US$6.93m, we think shareholders really should watch Inca One Gold's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inca One Gold 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.
Over 12 months, Inca One Gold reported revenue of US$29m, which is a gain of 123%. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Even though Inca One Gold managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$563k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$1.1m over the last twelve months. That means it's on the risky side of things. For riskier companies like Inca One Gold 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.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
