Is Syrah Resources (ASX:SYR) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Syrah Resources Limited (ASX:SYR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Syrah Resources

What Is Syrah Resources's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Syrah Resources had debt of US$69.4m, up from US$40.6m in one year. However, its balance sheet shows it holds US$85.6m in cash, so it actually has US$16.2m net cash.

How Strong Is Syrah Resources' Balance Sheet?

According to the last reported balance sheet, Syrah Resources had liabilities of US$18.2m due within 12 months, and liabilities of US$111.8m due beyond 12 months. Offsetting these obligations, it had cash of US$85.6m as well as receivables valued at US$5.07m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$39.4m.

Given Syrah Resources has a market capitalization of US$373.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Syrah Resources also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Syrah Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Syrah Resources had a loss before interest and tax, and actually shrunk its revenue by 62%, to US$12m. To be frank that doesn't bode well.

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. And over the same period it saw negative free cash outflow of US$41m and booked a US$57m accounting loss. However, it has net cash of US$16.2m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 3 warning signs with Syrah Resources , and understanding them should be part of your investment process.

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.

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.

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