Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Group 6 Metals Limited (ASX:G6M) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Our analysis indicates that G6M is potentially overvalued!
What Is Group 6 Metals's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Group 6 Metals had AU$10.8m of debt, an increase on none, over one year. However, it also had AU$4.72m in cash, and so its net debt is AU$6.10m.
How Strong Is Group 6 Metals' Balance Sheet?
According to the last reported balance sheet, Group 6 Metals had liabilities of AU$7.53m due within 12 months, and liabilities of AU$23.9m due beyond 12 months. On the other hand, it had cash of AU$4.72m and AU$1.17m worth of receivables due within a year. So its liabilities total AU$25.5m more than the combination of its cash and short-term receivables.
Group 6 Metals has a market capitalization of AU$107.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Group 6 Metals 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.
Given its lack of meaningful operating revenue, investors are probably hoping that Group 6 Metals finds some valuable resources, before it runs out of money.
Caveat Emptor
Importantly, Group 6 Metals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$38m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Group 6 Metals you should be aware of, and 3 of them are potentially serious.
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.
About ASX:G6M
Moderate and slightly overvalued.
