Health Check: How Prudently Does First Graphene (ASX:FGR) Use 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. Importantly, First Graphene Limited (ASX:FGR) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for First Graphene

How Much Debt Does First Graphene Carry?

As you can see below, First Graphene had AU$2.75m of debt at December 2023, down from AU$4.25m a year prior. But it also has AU$4.44m in cash to offset that, meaning it has AU$1.69m net cash.

A Look At First Graphene's Liabilities

The latest balance sheet data shows that First Graphene had liabilities of AU$3.24m due within a year, and liabilities of AU$389.7k falling due after that. Offsetting these obligations, it had cash of AU$4.44m as well as receivables valued at AU$43.9k due within 12 months. So it can boast AU$851.2k more liquid assets than total liabilities.

This short term liquidity is a sign that First Graphene could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that First Graphene 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 it is First Graphene'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.

Over 12 months, First Graphene reported revenue of AU$1.0m, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is First Graphene?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that First Graphene had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$2.8m and booked a AU$5.4m accounting loss. But at least it has AU$1.69m on the balance sheet to spend on growth, near-term. First Graphene's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that First Graphene is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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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.