Is Ballymore Resources (ASX:BMR) A Risky Investment?

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.' 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. As with many other companies Ballymore Resources Limited (ASX:BMR) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ballymore Resources's Net Debt?

As you can see below, at the end of December 2024, Ballymore Resources had AU$8.56m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$4.15m in cash offsetting this, leading to net debt of about AU$4.41m.

A Look At Ballymore Resources' Liabilities

The latest balance sheet data shows that Ballymore Resources had liabilities of AU$438.0k due within a year, and liabilities of AU$8.62m falling due after that. Offsetting this, it had AU$4.15m in cash and AU$434.1k in receivables that were due within 12 months. So its liabilities total AU$4.48m more than the combination of its cash and short-term receivables.

Given Ballymore Resources has a market capitalization of AU$30.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Ballymore 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.

View our latest analysis for Ballymore Resources

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

Caveat Emptor

Importantly, Ballymore Resources had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$1.9m. 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. However, it doesn't help that it burned through AU$6.9m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 5 warning signs we've spotted with Ballymore Resources (including 4 which are potentially serious) .

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.

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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.