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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that St-Georges Eco-Mining Corp. (CSE:SX) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is St-Georges Eco-Mining's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 St-Georges Eco-Mining had CA$12.4m of debt, an increase on CA$8.23m, over one year. However, it does have CA$6.63m in cash offsetting this, leading to net debt of about CA$5.78m.
A Look At St-Georges Eco-Mining's Liabilities
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. Offsetting these obligations, it had cash of CA$6.63m as well as receivables valued at CA$2.07m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.94m.
Given St-Georges Eco-Mining has a market capitalization of CA$42.8m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since St-Georges Eco-Mining 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.
Since St-Georges Eco-Mining has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Over the last twelve months St-Georges Eco-Mining produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$9.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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. We've identified 6 warning signs with St-Georges Eco-Mining (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.
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.