Would Dateline Resources (ASX:DTR) Be Better Off With Less Debt?

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. Importantly, Dateline Resources Limited (ASX:DTR) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dateline Resources

What Is Dateline Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Dateline Resources had debt of AU$11.7m, up from AU$3.81m in one year. However, because it has a cash reserve of AU$485.5k, its net debt is less, at about AU$11.2m.

How Healthy Is Dateline Resources' Balance Sheet?

We can see from the most recent balance sheet that Dateline Resources had liabilities of AU$7.66m falling due within a year, and liabilities of AU$11.3m due beyond that. On the other hand, it had cash of AU$485.5k and AU$144.9k worth of receivables due within a year. So its liabilities total AU$18.3m more than the combination of its cash and short-term receivables.

Dateline Resources has a market capitalization of AU$52.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 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

Importantly, Dateline Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$8.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$12m of cash over the last year. So suffice it to say we consider the stock very risky. 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 6 warning signs we've spotted with Dateline Resources (including 3 which are concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.