Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies St Barbara Limited (ASX:SBM) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for St Barbara
How Much Debt Does St Barbara Carry?
The chart below, which you can click on for greater detail, shows that St Barbara had AU$139.7m in debt in December 2022; about the same as the year before. However, it also had AU$37.5m in cash, and so its net debt is AU$102.2m.
A Look At St Barbara's Liabilities
We can see from the most recent balance sheet that St Barbara had liabilities of AU$243.8m falling due within a year, and liabilities of AU$136.9m due beyond that. Offsetting these obligations, it had cash of AU$37.5m as well as receivables valued at AU$30.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$313.2m.
This is a mountain of leverage relative to its market capitalization of AU$453.2m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if St Barbara can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year St Barbara had a loss before interest and tax, and actually shrunk its revenue by 3.9%, to AU$680m. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months St Barbara produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$249m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$54m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example - St Barbara has 1 warning sign we think you should be aware of.
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.
About ASX:SBM
St Barbara
Engages in the exploration, development, mining, and sale of gold.
Excellent balance sheet with reasonable growth potential.
