Is Group 6 Metals (ASX:G6M) Using Debt In A Risky Way?

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.' 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 the more important question is: how much risk is that debt creating?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Group 6 Metals

How Much Debt Does Group 6 Metals Carry?

As you can see below, at the end of December 2021, Group 6 Metals had AU$9.83m of debt, up from AU$5.45m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$36.1m in cash, so it actually has AU$26.2m net cash.

How Strong Is Group 6 Metals' Balance Sheet?

We can see from the most recent balance sheet that Group 6 Metals had liabilities of AU$7.65m falling due within a year, and liabilities of AU$17.2m due beyond that. Offsetting these obligations, it had cash of AU$36.1m as well as receivables valued at AU$26.4k due within 12 months. So it can boast AU$11.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Group 6 Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Group 6 Metals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Group 6 Metals's earnings that will influence how the balance sheet holds up in the future. 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.

So How Risky Is Group 6 Metals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Group 6 Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$11m of cash and made a loss of AU$11m. Given it only has net cash of AU$26.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Group 6 Metals (of which 3 are a bit concerning!) 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. 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.