We Think Dateline Resources (ASX:DTR) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Dateline Resources Limited (ASX:DTR) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dateline Resources

What Is Dateline Resources's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Dateline Resources had debt of AU$3.62m, up from AU$2.21m in one year. However, it does have AU$303.4k in cash offsetting this, leading to net debt of about AU$3.31m.

How Healthy Is Dateline Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dateline Resources had liabilities of AU$1.50m due within 12 months and liabilities of AU$8.14m due beyond that. Offsetting these obligations, it had cash of AU$303.4k as well as receivables valued at AU$30.2k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.30m.

This deficit isn't so bad because Dateline Resources is worth AU$24.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dateline Resources'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Dateline Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Not only did Dateline Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping AU$2.9m. 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$2.5m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Dateline Resources (including 3 which don't sit too well with us) .

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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