Is Strike Resources (ASX:SRK) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Strike Resources Limited (ASX:SRK) makes use of debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Strike Resources

How Much Debt Does Strike Resources Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Strike Resources had debt of AU$7.05m, up from none in one year. However, it does have AU$4.67m in cash offsetting this, leading to net debt of about AU$2.38m.

A Look At Strike Resources' Liabilities

According to the last reported balance sheet, Strike Resources had liabilities of AU$2.52m due within 12 months, and liabilities of AU$6.97m due beyond 12 months. Offsetting these obligations, it had cash of AU$4.67m as well as receivables valued at AU$759.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$4.07m.

Since publicly traded Strike Resources shares are worth a total of AU$31.1m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Strike Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least Strike Resources booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Strike Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$3.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$8.6m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Strike Resources (including 1 which is significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.