Is EQ Resources (ASX:EQR) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, EQ Resources Limited (ASX:EQR) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 EQ Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 EQ Resources had debt of AU$43.9m, up from AU$2.23m in one year. However, it also had AU$2.01m in cash, and so its net debt is AU$41.8m.

A Look At EQ Resources' Liabilities

We can see from the most recent balance sheet that EQ Resources had liabilities of AU$112.4m falling due within a year, and liabilities of AU$27.5m due beyond that. Offsetting these obligations, it had cash of AU$2.01m as well as receivables valued at AU$5.41m due within 12 months. So it has liabilities totalling AU$132.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's AU$92.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EQ 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.

See our latest analysis for EQ Resources

In the last year EQ Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 372%, to AU$56m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though EQ Resources managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable AU$38m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through AU$26m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that EQ Resources is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.