Walkabout Resources (ASX:WKT) Is Carrying A Fair Bit Of Debt

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 Walkabout Resources Limited (ASX:WKT) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Walkabout Resources

What Is Walkabout Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Walkabout Resources had AU$31.4m of debt, an increase on AU$1.40m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Walkabout Resources' Balance Sheet?

We can see from the most recent balance sheet that Walkabout Resources had liabilities of AU$8.05m falling due within a year, and liabilities of AU$28.6m due beyond that. Offsetting these obligations, it had cash of AU$380.7k as well as receivables valued at AU$3.32m due within 12 months. So it has liabilities totalling AU$32.9m more than its cash and near-term receivables, combined.

Walkabout Resources has a market capitalization of AU$64.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Walkabout Resources will need earnings to service that debt. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Walkabout Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Walkabout Resources had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$5.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$31m of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Walkabout Resources you should be aware of, and 3 of them are a bit unpleasant.

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.