Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Matsa Resources Limited (ASX:MAT) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Matsa Resources
What Is Matsa Resources's Net Debt?
The chart below, which you can click on for greater detail, shows that Matsa Resources had AU$4.03m in debt in December 2022; about the same as the year before. However, it does have AU$4.17m in cash offsetting this, leading to net cash of AU$146.0k.
How Healthy Is Matsa Resources' Balance Sheet?
The latest balance sheet data shows that Matsa Resources had liabilities of AU$5.12m due within a year, and liabilities of AU$4.42m falling due after that. Offsetting this, it had AU$4.17m in cash and AU$243.5k in receivables that were due within 12 months. So it has liabilities totalling AU$5.12m more than its cash and near-term receivables, combined.
Matsa Resources has a market capitalization of AU$16.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Matsa Resources 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 you can't view debt in total isolation; since Matsa Resources 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 Matsa Resources finds some valuable resources, before it runs out of money.
So How Risky Is Matsa Resources?
Although Matsa Resources had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$1.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 instance, we've identified 4 warning signs for Matsa Resources (1 is a bit concerning) you should be aware of.
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:MAT
Matsa Resources
Engages in the exploration of mineral resources in Western Australia and Thailand.
Slight with mediocre balance sheet.