Health Check: How Prudently Does Reward Minerals (ASX:RWD) Use Debt?

Simply Wall St

Fri, Apr 1, 2022, 8:17 PM 4 min read

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.' 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. As with many other companies Reward Minerals Ltd (ASX:RWD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Reward Minerals

What Is Reward Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Reward Minerals had debt of AU$2.48m, up from AU$1.38m in one year. However, it does have AU$3.16m in cash offsetting this, leading to net cash of AU$680.4k.

debt-equity-history-analysis — ASX:RWD Debt to Equity History April 1st 2022

How Strong Is Reward Minerals' Balance Sheet?

The latest balance sheet data shows that Reward Minerals had liabilities of AU$3.36m due within a year, and liabilities of AU$121.7k falling due after that. On the other hand, it had cash of AU$3.16m and AU$83.7k worth of receivables due within a year. So its liabilities total AU$239.6k more than the combination of its cash and short-term receivables.

This state of affairs indicates that Reward Minerals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$21.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Reward Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Reward 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.

It seems likely shareholders hope that Reward Minerals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Reward Minerals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Reward Minerals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$2.6m of cash and made a loss of AU$636k. Given it only has net cash of AU$680.4k, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Reward Minerals's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should learn about the 3 warning signs we've spotted with Reward Minerals (including 2 which make us uncomfortable) .

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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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.