Emerald Resources (ASX:EMR) Has A Rock Solid Balance Sheet

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.' 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. We can see that Emerald Resources NL (ASX:EMR) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Emerald Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that Emerald Resources had AU$19.1m of debt in December 2024, down from AU$62.0m, one year before. But it also has AU$217.5m in cash to offset that, meaning it has AU$198.4m net cash.

How Strong Is Emerald Resources' Balance Sheet?

We can see from the most recent balance sheet that Emerald Resources had liabilities of AU$116.4m falling due within a year, and liabilities of AU$35.7m due beyond that. On the other hand, it had cash of AU$217.5m and AU$9.37m worth of receivables due within a year. So it actually has AU$74.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Emerald Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Emerald Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Emerald Resources

Also positive, Emerald Resources grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Emerald Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Emerald Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Emerald Resources generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Emerald Resources has net cash of AU$198.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of AU$186m, being 95% of its EBIT. So we don't think Emerald Resources's use of debt is risky. Another factor that would give us confidence in Emerald Resources would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.