Is Catalyst Metals (ASX:CYL) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Catalyst Metals Limited (ASX:CYL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Catalyst Metals

What Is Catalyst Metals's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Catalyst Metals had debt of AU$15.9m, up from AU$647.2k in one year. However, it does have AU$22.9m in cash offsetting this, leading to net cash of AU$7.00m.

A Look At Catalyst Metals' Liabilities

According to the last reported balance sheet, Catalyst Metals had liabilities of AU$110.2m due within 12 months, and liabilities of AU$44.2m due beyond 12 months. Offsetting these obligations, it had cash of AU$22.9m as well as receivables valued at AU$9.19m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$122.3m.

This deficit is considerable relative to its market capitalization of AU$137.6m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Catalyst Metals'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.

Over 12 months, Catalyst Metals reported revenue of AU$164m, which is a gain of 154%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for 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$25m of cash and made a loss of AU$17m. With only AU$7.00m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Catalyst Metals's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For instance, we've identified 3 warning signs for Catalyst Metals that 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.