Is Mayur Resources (ASX:MRL) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Mayur Resources Ltd (ASX:MRL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 examine debt levels, we first consider both cash and debt levels, 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 June 2023 Mayur Resources had AU$2.79m of debt, an increase on none, over one year. But on the other hand it also has AU$4.14m in cash, leading to a AU$1.35m net cash position.

A Look At Mayur Resources' Liabilities

According to the last reported balance sheet, Mayur Resources had liabilities of AU$1.52m due within 12 months, and liabilities of AU$7.39m due beyond 12 months. Offsetting these obligations, it had cash of AU$4.14m as well as receivables valued at AU$400.1k due within 12 months. So its liabilities total AU$4.37m more than the combination of its cash and short-term receivables.

Given Mayur Resources has a market capitalization of AU$54.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, 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?

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$8.1m of cash and made a loss of AU$13m. With only AU$1.35m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Mayur Resources has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Mayur Resources (4 don't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.