Is Tasman Resources (ASX:TAS) Using Debt In A Risky Way?

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. We note that Tasman Resources Ltd (ASX:TAS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Tasman Resources

What Is Tasman Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Tasman Resources had debt of AU$5.10m, up from AU$836.4k in one year. But it also has AU$6.92m in cash to offset that, meaning it has AU$1.82m net cash.

How Healthy Is Tasman Resources' Balance Sheet?

We can see from the most recent balance sheet that Tasman Resources had liabilities of AU$5.78m falling due within a year, and liabilities of AU$532.6k due beyond that. Offsetting these obligations, it had cash of AU$6.92m as well as receivables valued at AU$394.6k due within 12 months. So it can boast AU$997.4k more liquid assets than total liabilities.

This surplus suggests that Tasman Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tasman Resources boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Tasman Resources's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Tasman Resources reported revenue of AU$2.8m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Tasman Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Tasman Resources had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$8.7m and booked a AU$1.9m accounting loss. Given it only has net cash of AU$1.82m, the company may need to raise more capital if it doesn't reach break-even soon. Tasman Resources's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Tasman Resources is showing 6 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.

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This article by Simply Wall St is general in nature. 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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