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. Importantly, Syrah Resources Limited (ASX:SYR) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Syrah Resources
What Is Syrah Resources's Net Debt?
As you can see below, at the end of June 2021, Syrah Resources had US$69.4m of debt, up from US$40.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$85.6m in cash, so it actually has US$16.2m net cash.
How Strong Is Syrah Resources' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Syrah Resources had liabilities of US$18.2m due within 12 months and liabilities of US$111.8m due beyond that. Offsetting this, it had US$85.6m in cash and US$5.07m in receivables that were due within 12 months. So its liabilities total US$39.4m more than the combination of its cash and short-term receivables.
Given Syrah Resources has a market capitalization of US$427.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Syrah Resources boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Syrah Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Syrah Resources had a loss before interest and tax, and actually shrunk its revenue by 62%, to US$12m. To be frank that doesn't bode well.
So How Risky Is Syrah Resources?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Syrah Resources had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$41m of cash and made a loss of US$57m. However, it has net cash of US$16.2m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 3 warning signs for Syrah Resources you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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