Is Burgundy Diamond Mines (ASX:BDM) Using Debt Sensibly?

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.' 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 can see that Burgundy Diamond Mines Limited (ASX:BDM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Burgundy Diamond Mines

What Is Burgundy Diamond Mines's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Burgundy Diamond Mines had AU$27.7m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$30.2m in cash, so it actually has AU$2.44m net cash.

How Strong Is Burgundy Diamond Mines' Balance Sheet?

We can see from the most recent balance sheet that Burgundy Diamond Mines had liabilities of AU$593.4k falling due within a year, and liabilities of AU$28.4m due beyond that. Offsetting this, it had AU$30.2m in cash and AU$1.62m in receivables that were due within 12 months. So it actually has AU$2.78m more liquid assets than total liabilities.

This surplus suggests that Burgundy Diamond Mines has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Burgundy Diamond Mines 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 you can't view debt in total isolation; since Burgundy Diamond Mines 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.

Since Burgundy Diamond Mines has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Burgundy Diamond Mines?

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 Burgundy Diamond Mines lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$29m and booked a AU$22m accounting loss. But the saving grace is the AU$2.44m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with Burgundy Diamond Mines (at least 3 which don't sit too well with us) , and understanding them should be part of your investment process.

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.

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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.