Is Euromax Resources (TSE:EOX) Weighed On By Its Debt Load?

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.' 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 Euromax Resources Ltd. (TSE:EOX) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Euromax Resources

What Is Euromax Resources's Debt?

The chart below, which you can click on for greater detail, shows that Euromax Resources had CA$21.8m in debt in June 2021; about the same as the year before. However, it also had CA$960.0k in cash, and so its net debt is CA$20.9m.

A Look At Euromax Resources' Liabilities

We can see from the most recent balance sheet that Euromax Resources had liabilities of CA$37.6m falling due within a year, and liabilities of CA$96.0k due beyond that. Offsetting these obligations, it had cash of CA$960.0k as well as receivables valued at CA$38.0k due within 12 months. So its liabilities total CA$36.7m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CA$28.2m, we think shareholders really should watch Euromax Resources's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Euromax Resources 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.

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

Caveat Emptor

Over the last twelve months Euromax Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$4.3m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$4.0m in negative free cash flow over the last year. That means it's on the risky side of things. 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 Euromax Resources you should be aware of, and 2 of them don't sit too well with us.

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.
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