Is Catalyst Metals (ASX:CYL) 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 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 Catalyst Metals Limited (ASX:CYL) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 Catalyst Metals

How Much Debt Does Catalyst Metals Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Catalyst Metals had debt of AU$19.4m, up from AU$1.51m in one year. But it also has AU$32.0m in cash to offset that, meaning it has AU$12.5m net cash.

How Healthy Is Catalyst Metals' Balance Sheet?

We can see from the most recent balance sheet that Catalyst Metals had liabilities of AU$99.3m falling due within a year, and liabilities of AU$44.3m due beyond that. Offsetting this, it had AU$32.0m in cash and AU$2.64m in receivables that were due within 12 months. So its liabilities total AU$109.0m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of AU$145.3m, so it does suggest shareholders should keep an eye on Catalyst Metals' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Catalyst Metals 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 Catalyst Metals'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.

Over 12 months, Catalyst Metals saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Catalyst Metals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Catalyst Metals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$17m of cash and made a loss of AU$16m. While this does make the company a bit risky, it's important to remember it has net cash of AU$12.5m. That means it could keep spending at its current rate for more than two years. 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 example, we've discovered 3 warning signs for Catalyst Metals (2 are a bit unpleasant!) that you should be aware of before investing here.

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.