Is Emerald Resources (ASX:EMR) A Risky Investment?

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. We note that Emerald Resources NL (ASX:EMR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Emerald Resources

What Is Emerald Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Emerald Resources had AU$84.5m of debt, an increase on none, over one year. However, it does have AU$136.4m in cash offsetting this, leading to net cash of AU$51.9m.

How Healthy Is Emerald Resources's Balance Sheet?

The latest balance sheet data shows that Emerald Resources had liabilities of AU$5.56m due within a year, and liabilities of AU$84.7m falling due after that. On the other hand, it had cash of AU$136.4m and AU$1.32m worth of receivables due within a year. So it actually has AU$47.4m more liquid assets than total liabilities.

It's good to see that Emerald Resources has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Emerald Resources has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Emerald 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 Emerald Resources finds some valuable resources, before it runs out of money.

So How Risky Is Emerald Resources?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Emerald Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$38m of cash and made a loss of AU$11m. With only AU$51.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Emerald Resources you should know about.

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. 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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