St-Georges Eco-Mining (CSE:SX) Is Making Moderate Use Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, St-Georges Eco-Mining Corp. (CSE:SX) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for St-Georges Eco-Mining

What Is St-Georges Eco-Mining's Net Debt?

As you can see below, at the end of December 2021, St-Georges Eco-Mining had CA$12.4m of debt, up from CA$8.23m a year ago. Click the image for more detail. However, it also had CA$6.63m in cash, and so its net debt is CA$5.78m.

How Healthy Is St-Georges Eco-Mining's Balance Sheet?

The latest balance sheet data shows that St-Georges Eco-Mining had liabilities of CA$10.4m due within a year, and liabilities of CA$5.28m falling due after that. On the other hand, it had cash of CA$6.63m and CA$2.07m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.94m.

Since publicly traded St-Georges Eco-Mining shares are worth a total of CA$75.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is St-Georges Eco-Mining'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.

Given its lack of meaningful operating revenue, investors are probably hoping that St-Georges Eco-Mining finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, St-Georges Eco-Mining had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$9.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$19m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example St-Georges Eco-Mining has 6 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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. 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.