Health Check: How Prudently Does Laramide Resources (TSE:LAM) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Laramide Resources Ltd. (TSE:LAM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Laramide Resources

What Is Laramide Resources's Debt?

The image below, which you can click on for greater detail, shows that Laramide Resources had debt of CA$6.63m at the end of December 2021, a reduction from CA$7.15m over a year. However, its balance sheet shows it holds CA$8.48m in cash, so it actually has CA$1.85m net cash.

How Strong Is Laramide Resources' Balance Sheet?

We can see from the most recent balance sheet that Laramide Resources had liabilities of CA$7.94m falling due within a year, and liabilities of CA$9.91m due beyond that. Offsetting this, it had CA$8.48m in cash and CA$106.2k in receivables that were due within 12 months. So it has liabilities totalling CA$9.26m more than its cash and near-term receivables, combined.

Of course, Laramide Resources has a market capitalization of CA$168.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Laramide 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 you can't view debt in total isolation; since Laramide 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, Laramide Resources shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is Laramide Resources?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Laramide Resources had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$4.2m of cash and made a loss of CA$8.9m. With only CA$1.85m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. For instance, we've identified 5 warning signs for Laramide Resources (2 are potentially serious) you should be aware of.

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.

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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.