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Is Tasman Resources (ASX:TAS) Weighed On By Its Debt Load?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Tasman Resources Ltd (ASX:TAS) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tasman Resources

How Much Debt Does Tasman Resources Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tasman Resources had AU$5.10m of debt, an increase on AU$836.4k, over one year. But on the other hand it also has AU$6.92m in cash, leading to a AU$1.82m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Tasman Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tasman Resources had liabilities of AU$5.78m due within 12 months and liabilities of AU$532.6k due beyond that. Offsetting this, it had AU$6.92m in cash and AU$394.6k in receivables that were due within 12 months. So it can boast AU$997.4k more liquid assets than total liabilities.

This surplus suggests that Tasman Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tasman Resources boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tasman Resources 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.

Over 12 months, Tasman Resources reported revenue of AU$2.8m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Tasman Resources?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Tasman Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$2.8m of cash and made a loss of AU$1.9m. Given it only has net cash of AU$1.82m, the company may need to raise more capital if it doesn't reach break-even soon. Tasman Resources's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tasman Resources is showing 6 warning signs in our investment analysis , and 2 of those are a bit concerning...

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.

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. 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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