Yahoo Finance Is Robex Resources (CVE:RBX) Using Too Much Debt?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Robex Resources Inc. (CVE:RBX) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Robex Resources
How Much Debt Does Robex Resources Carry?
The image below, which you can click on for greater detail, shows that at December 2021 Robex Resources had debt of CA$11.4m, up from CA$7.59m in one year. But on the other hand it also has CA$20.7m in cash, leading to a CA$9.37m net cash position.
How Healthy Is Robex Resources' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Robex Resources had liabilities of CA$35.5m due within 12 months and liabilities of CA$8.57m due beyond that. Offsetting these obligations, it had cash of CA$20.7m as well as receivables valued at CA$4.22m due within 12 months. So it has liabilities totalling CA$19.1m more than its cash and near-term receivables, combined.
Of course, Robex Resources has a market capitalization of CA$222.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Robex Resources boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Robex Resources's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Robex 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Robex Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Robex Resources recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
We could understand if investors are concerned about Robex Resources's liabilities, but we can be reassured by the fact it has has net cash of CA$9.37m. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CA$8.7m. So we don't have any problem with Robex Resources's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Robex Resources , and understanding them should be part of your investment process.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
