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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, 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.

See 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.

How Strong Is Mayur Resources' Balance Sheet?

We can see from the most recent balance sheet that Mayur Resources had liabilities of AU$4.46m falling due within a year, and liabilities of AU$10.0 due beyond that. On the other hand, it had cash of AU$6.46m and AU$176.9k worth of receivables due within a year. So it can boast AU$2.17m more liquid assets than total liabilities.

This surplus suggests that Mayur Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Mayur Resources 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 you can't view debt in total isolation; since Mayur 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 Mayur Resources finds some valuable resources, before it runs out of money.

So How Risky Is Mayur Resources?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Mayur Resources had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$5.9m and booked a AU$6.2m accounting loss. Given it only has net cash of AU$3.46m, 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Mayur Resources (of which 2 make us uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.