Is Brightstar Resources (ASX:BTR) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Brightstar Resources Limited (ASX:BTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Brightstar Resources's Net Debt?

As you can see below, at the end of December 2024, Brightstar Resources had AU$3.27m of debt, up from none a year ago. Click the image for more detail. But it also has AU$21.3m in cash to offset that, meaning it has AU$18.0m net cash.

A Look At Brightstar Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Brightstar Resources had liabilities of AU$28.6m due within 12 months and liabilities of AU$14.1m due beyond that. Offsetting this, it had AU$21.3m in cash and AU$6.14m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$15.3m.

Given Brightstar Resources has a market capitalization of AU$214.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Brightstar Resources also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Brightstar Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for Brightstar Resources

In the last year Brightstar Resources managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Brightstar Resources?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Brightstar Resources had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$44m of cash and made a loss of AU$21m. With only AU$18.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 3 warning signs for Brightstar Resources (2 shouldn't be ignored) you should be aware of.

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.