Is Ballymore Resources (ASX:BMR) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Ballymore Resources

What Is Ballymore Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ballymore Resources had AU$7.79m of debt, an increase on none, over one year. But on the other hand it also has AU$7.94m in cash, leading to a AU$146.8k net cash position.

A Look At Ballymore Resources' Liabilities

The latest balance sheet data shows that Ballymore Resources had liabilities of AU$775.6k due within a year, and liabilities of AU$7.82m falling due after that. Offsetting these obligations, it had cash of AU$7.94m as well as receivables valued at AU$179.3k due within 12 months. So it has liabilities totalling AU$476.7k more than its cash and near-term receivables, combined.

This state of affairs indicates that Ballymore Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$27.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Ballymore 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 it is Ballymore Resources's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

So How Risky Is Ballymore Resources?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Ballymore Resources had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$4.6m and booked a AU$1.9m accounting loss. But at least it has AU$146.8k on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 3 which are potentially serious) .

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.

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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.