Is Mayur Resources (ASX:MRL) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Mayur Resources Ltd (ASX:MRL) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mayur Resources

What Is Mayur Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Mayur Resources had AU$3.00m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$6.46m in cash, so it actually has AU$3.46m net cash.

A Look At Mayur Resources' Liabilities

According to the last reported balance sheet, Mayur Resources had liabilities of AU$4.46m due within 12 months, and liabilities of AU$10.0 due beyond 12 months. Offsetting these obligations, it had cash of AU$6.46m as well as receivables valued at AU$176.9k due within 12 months. So it can boast AU$2.17m more liquid assets than total liabilities.

This short term liquidity is a sign that Mayur Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mayur Resources has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mayur Resources's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Mayur Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Mayur Resources?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Mayur Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$5.9m of cash and made a loss of AU$6.2m. With only AU$3.46m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Mayur Resources you should be aware of, and 2 of them are potentially serious.

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.