Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Mayur Resources Ltd. (ASX:MRL) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Mayur Resources
How much debt does Mayur Resources have?
You can click on the graph below for historical figures, but it shows that in December 2021 Mayur Resources had debt of A$3.00 million, an increase from zero, year on year. However, his balance sheet shows he is holding A$6.46 million in cash, so he actually has A$3.46 million in net cash.
How strong is Mayur Resources’ balance sheet?
We can see from the most recent balance sheet that Mayur Resources had liabilities of A$4.46 million due within a year, and liabilities of A$10.0 due beyond. On the other hand, it had cash of A$6.46 million and A$176.9k of receivables due within one year. He can therefore boast that he has 2.17 million Australian dollars more in cash than total Passives.
This surplus suggests that Mayur Resources has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. In summary, Mayur Resources has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Mayur Resources will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Given its lack of significant operating revenue, investors are likely hoping Mayur Resources will find valuable resources before it runs out of money.
So how risky is Mayur Resources?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And over the past year, Mayur Resources has posted a loss in earnings before interest and taxes (EBIT), if truth be told. And over the same period, it had a negative free cash outflow of A$5.9 million and recorded a book loss of A$6.2 million. Given that it only has net cash of A$3.46 million, the company may need to raise more capital if it does not break even soon. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 5 warning signs for Mayur Resources (2 of which make us uncomfortable!) that you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.