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Is Taranis Resources (CVE:TRO) Using Debt In A Risky Way?

Simply Wall St

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Taranis Resources Inc. (CVE:TRO) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Taranis Resources

How Much Debt Does Taranis Resources Carry?

The chart below, which you can click on for greater detail, shows that Taranis Resources had CA$348.3k in debt in March 2019; about the same as the year before. On the flip side, it has CA$215.3k in cash leading to net debt of about CA$133.1k.

TSXV:TRO Historical Debt, July 26th 2019

How Healthy Is Taranis Resources's Balance Sheet?

According to the last reported balance sheet, Taranis Resources had liabilities of CA$651.9k due within 12 months, and liabilities of CA$338.3k due beyond 12 months. On the other hand, it had cash of CA$215.3k and CA$3.1k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$771.9k.

Given Taranis Resources has a market capitalization of CA$4.95m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Taranis 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Taranis Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Taranis Resources produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$151k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$595k in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Taranis Resources I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.