Laramide Resources (TSE:LAM) Has Debt But No Earnings; Should You Worry?

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 Laramide Resources Ltd. (TSE:LAM) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that LAM is potentially overvalued!

What Is Laramide Resources's Net Debt?

The image below, which you can click on for greater detail, shows that Laramide Resources had debt of CA$5.92m at the end of September 2022, a reduction from CA$7.51m over a year. But on the other hand it also has CA$8.13m in cash, leading to a CA$2.21m net cash position.

How Healthy Is Laramide Resources' Balance Sheet?

We can see from the most recent balance sheet that Laramide Resources had liabilities of CA$9.02m falling due within a year, and liabilities of CA$3.72m due beyond that. Offsetting these obligations, it had cash of CA$8.13m as well as receivables valued at CA$68.4k due within 12 months. So it has liabilities totalling CA$4.54m more than its cash and near-term receivables, combined.

Since publicly traded Laramide Resources shares are worth a total of CA$111.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Laramide 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 Laramide Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$5.1m of cash and made a loss of CA$2.3m. Given it only has net cash of CA$2.21m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Laramide Resources (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.