Is Bass Metals (ASX:BSM) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Bass Metals Limited (ASX:BSM) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Bass Metals

What Is Bass Metals's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Bass Metals had debt of AU$6.05m, up from AU$4.87m in one year. On the flip side, it has AU$1.32m in cash leading to net debt of about AU$4.73m.

How Strong Is Bass Metals' Balance Sheet?

The latest balance sheet data shows that Bass Metals had liabilities of AU$7.05m due within a year, and liabilities of AU$424.0k falling due after that. Offsetting these obligations, it had cash of AU$1.32m as well as receivables valued at AU$83.6k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$6.07m.

While this might seem like a lot, it is not so bad since Bass Metals has a market capitalization of AU$21.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bass Metals'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.

In the last year Bass Metals had a loss before interest and tax, and actually shrunk its revenue by 66%, to AU$635k. That makes us nervous, to say the least.

Caveat Emptor

Not only did Bass Metals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$8.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$2.9m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Bass Metals is showing 6 warning signs in our investment analysis , and 3 of those are significant...

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. 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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