Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Dateline Resources Limited (ASX:DTR) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
Check out our latest analysis for Dateline Resources
How Much Debt Does Dateline Resources Carry?
As you can see below, at the end of June 2021, Dateline Resources had AU$12.3m of debt, up from AU$2.79m a year ago. Click the image for more detail. However, it also had AU$7.09m in cash, and so its net debt is AU$5.17m.
How Strong Is Dateline Resources' Balance Sheet?
The latest balance sheet data shows that Dateline Resources had liabilities of AU$1.46m due within a year, and liabilities of AU$18.0m falling due after that. Offsetting these obligations, it had cash of AU$7.09m as well as receivables valued at AU$355.6k due within 12 months. So it has liabilities totalling AU$12.0m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Dateline Resources has a market capitalization of AU$40.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dateline Resources will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Since Dateline Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Over the last twelve months Dateline Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$5.5m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$3.4m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 5 warning signs for Dateline Resources (3 are significant!) that you should be aware of before investing here.
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.
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About ASX:DTR
Dateline Resources
Engages in mining and exploration of mineral properties in North America.
Moderate with mediocre balance sheet.
