Is First Graphene (ASX:FGR) Using Too Much 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 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. As with many other companies First Graphene Limited (ASX:FGR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for First Graphene

What Is First Graphene's Debt?

As you can see below, First Graphene had AU$2.62m of debt at June 2024, down from AU$3.62m a year prior. But it also has AU$3.16m in cash to offset that, meaning it has AU$538.1k net cash.

A Look At First Graphene's Liabilities

The latest balance sheet data shows that First Graphene had liabilities of AU$3.21m due within a year, and liabilities of AU$322.6k falling due after that. Offsetting these obligations, it had cash of AU$3.16m as well as receivables valued at AU$63.5k due within 12 months. So its liabilities total AU$308.6k more than the combination of its cash and short-term receivables.

Having regard to First Graphene's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$29.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, First Graphene boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 made a loss at the EBIT level, and saw its revenue drop to AU$675k, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is First Graphene?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year First Graphene had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$2.9m and booked a AU$5.7m accounting loss. But at least it has AU$538.1k on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example First Graphene has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.