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.' 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. Importantly, Ceylon Graphite Corp. (CVE:CYL) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ceylon Graphite's Net Debt?
As you can see below, at the end of June 2022, Ceylon Graphite had CA$2.09m of debt, up from CA$1.77m a year ago. Click the image for more detail. But it also has CA$2.50m in cash to offset that, meaning it has CA$415.8k net cash.
How Healthy Is Ceylon Graphite's Balance Sheet?
The latest balance sheet data shows that Ceylon Graphite had liabilities of CA$3.61m due within a year, and liabilities of CA$14.4k falling due after that. Offsetting these obligations, it had cash of CA$2.50m as well as receivables valued at CA$36.9k due within 12 months. So its liabilities total CA$1.08m more than the combination of its cash and short-term receivables.
Of course, Ceylon Graphite has a market capitalization of CA$20.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ceylon Graphite also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Ceylon Graphite'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.
Since Ceylon Graphite has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Ceylon Graphite?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ceylon Graphite had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$2.3m of cash and made a loss of CA$3.5m. Given it only has net cash of CA$415.8k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example Ceylon Graphite has 5 warning signs (and 3 which are significant) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here