Is Karora Resources (TSE:KRR) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Karora Resources Inc. (TSE:KRR) does use debt in its business. But is this debt a concern to shareholders?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Karora Resources

What Is Karora Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Karora Resources had CA$38.8m of debt, an increase on CA$31.3m, over one year. But it also has CA$73.4m in cash to offset that, meaning it has CA$34.6m net cash.

How Strong Is Karora Resources' Balance Sheet?

According to the last reported balance sheet, Karora Resources had liabilities of CA$55.8m due within 12 months, and liabilities of CA$142.8m due beyond 12 months. On the other hand, it had cash of CA$73.4m and CA$5.23m worth of receivables due within a year. So it has liabilities totalling CA$120.0m more than its cash and near-term receivables, combined.

Of course, Karora Resources has a market capitalization of CA$679.4m, 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. While it does have liabilities worth noting, Karora Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

Karora Resources's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Karora Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Karora Resources has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Karora Resources burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Karora Resources's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$34.6m. So we are not troubled with Karora Resources's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Karora Resources .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.