Highfield Resources (ASX:HFR) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Highfield Resources Limited (ASX:HFR) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Highfield Resources

How Much Debt Does Highfield Resources Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Highfield Resources had debt of AU$11.3m, up from none in one year. But it also has AU$19.4m in cash to offset that, meaning it has AU$8.12m net cash.

How Healthy Is Highfield Resources' Balance Sheet?

We can see from the most recent balance sheet that Highfield Resources had liabilities of AU$20.2m falling due within a year, and liabilities of AU$70.5k due beyond that. On the other hand, it had cash of AU$19.4m and AU$258.3k worth of receivables due within a year. So its liabilities total AU$533.7k more than the combination of its cash and short-term receivables.

This state of affairs indicates that Highfield Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$208.2m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Highfield Resources also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Highfield Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

It seems likely shareholders hope that Highfield Resources can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Highfield Resources?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Highfield Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$16m of cash and made a loss of AU$5.8m. But the saving grace is the AU$8.12m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Highfield Resources has 4 warning signs (and 2 which are concerning) we think you should know about.

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.