Health Check: How Prudently Does Syrah Resources (ASX:SYR) Use Debt?

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.' 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. We can see that Syrah Resources Limited (ASX:SYR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Syrah Resources

What Is Syrah Resources's Net Debt?

As you can see below, Syrah Resources had US$70.9m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$90.4m in cash to offset that, meaning it has US$19.5m net cash.

A Look At Syrah Resources' Liabilities

We can see from the most recent balance sheet that Syrah Resources had liabilities of US$30.0m falling due within a year, and liabilities of US$101.8m due beyond that. Offsetting these obligations, it had cash of US$90.4m as well as receivables valued at US$13.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$28.5m.

Of course, Syrah Resources has a market capitalization of US$629.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Syrah Resources boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Syrah Resources 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.

Over 12 months, Syrah Resources reported revenue of US$106m, which is a gain of 266%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Syrah Resources?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Syrah Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$130m of cash and made a loss of US$27m. But at least it has US$19.5m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Syrah Resources has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 instance, we've identified 2 warning signs for Syrah Resources (1 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.