We Think Matsa Resources (ASX:MAT) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Matsa Resources

What Is Matsa Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Matsa Resources had AU$5.03m of debt, an increase on AU$4.03m, over one year. However, it also had AU$746.9k in cash, and so its net debt is AU$4.28m.

How Healthy Is Matsa Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Matsa Resources had liabilities of AU$3.48m due within 12 months and liabilities of AU$6.85m due beyond that. On the other hand, it had cash of AU$746.9k and AU$187.9k worth of receivables due within a year. So its liabilities total AU$9.39m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of AU$13.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Matsa Resources'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 Matsa Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Matsa Resources produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$247k. 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$5.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 5 warning signs for Matsa Resources (of which 3 are significant!) 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.