Resolute Mining (ASX:RSG) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Resolute Mining Limited (ASX:RSG) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Resolute Mining

What Is Resolute Mining's Net Debt?

The image below, which you can click on for greater detail, shows that Resolute Mining had debt of US$316.7m at the end of December 2021, a reduction from US$336.2m over a year. On the flip side, it has US$88.4m in cash leading to net debt of about US$228.3m.

How Healthy Is Resolute Mining's Balance Sheet?

The latest balance sheet data shows that Resolute Mining had liabilities of US$250.1m due within a year, and liabilities of US$308.5m falling due after that. Offsetting these obligations, it had cash of US$88.4m as well as receivables valued at US$84.3m due within 12 months. So its liabilities total US$385.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$188.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Resolute Mining would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Resolute Mining can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Resolute Mining had a loss before interest and tax, and actually shrunk its revenue by 8.9%, to US$549m. That's not what we would hope to see.

Caveat Emptor

Importantly, Resolute Mining had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$288m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$11m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 1 warning sign for Resolute Mining 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.