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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Mayur Resources Ltd (ASX:MRL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mayur Resources

What Is Mayur Resources's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Mayur Resources had debt of AU$8.49m, up from none in one year. On the flip side, it has AU$4.01m in cash leading to net debt of about AU$4.48m.

How Strong Is Mayur Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mayur Resources had liabilities of AU$11.3m due within 12 months and liabilities of AU$3.23m due beyond that. Offsetting this, it had AU$4.01m in cash and AU$763.7k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.78m.

Since publicly traded Mayur Resources shares are worth a total of AU$67.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 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.

Caveat Emptor

Over the last twelve months Mayur Resources produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$6.2m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$11m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 (3 are a bit unpleasant!) that you should be aware of before investing here.

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.

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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.