Is Tasman Resources (ASX:TAS) Weighed On By Its Debt Load?

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 can see that Tasman Resources Ltd (ASX:TAS) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Tasman Resources had AU$5.26m of debt in June 2021, down from AU$6.03m, one year before. But on the other hand it also has AU$6.01m in cash, leading to a AU$754.9k net cash position.

A Look At Tasman Resources' Liabilities

The latest balance sheet data shows that Tasman Resources had liabilities of AU$5.92m due within a year, and liabilities of AU$504.5k falling due after that. On the other hand, it had cash of AU$6.01m and AU$599.7k worth of receivables due within a year. So it actually has AU$188.1k more liquid assets than total liabilities.

This state of affairs indicates that Tasman Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$23.5m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Tasman Resources has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tasman Resources will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tasman Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to AU$3.3m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Tasman Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Tasman Resources had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$9.3m of cash and made a loss of AU$2.7m. Given it only has net cash of AU$754.9k, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Tasman Resources may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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, we've discovered 5 warning signs for Tasman Resources (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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