Is Calidus Resources (ASX:CAI) Using Debt In A Risky Way?

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.' 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. As with many other companies Calidus Resources Limited (ASX:CAI) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Calidus Resources

How Much Debt Does Calidus Resources Carry?

You can click the graphic below for the historical numbers, but it shows that Calidus Resources had AU$81.0m of debt in June 2023, down from AU$107.0m, one year before. However, it does have AU$21.6m in cash offsetting this, leading to net debt of about AU$59.4m.

How Strong Is Calidus Resources' Balance Sheet?

We can see from the most recent balance sheet that Calidus Resources had liabilities of AU$53.5m falling due within a year, and liabilities of AU$66.5m due beyond that. Offsetting these obligations, it had cash of AU$21.6m as well as receivables valued at AU$1.19m due within 12 months. So it has liabilities totalling AU$97.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$103.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Calidus 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.

While it hasn't made a profit, at least Calidus Resources booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Calidus Resources produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$305k. 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. Another cause for caution is that is bled AU$7.1m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Calidus Resources you should know about.

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.