Does Mandalay Resources (TSE:MND) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Mandalay Resources Corporation (TSE:MND) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mandalay Resources

How Much Debt Does Mandalay Resources Carry?

The image below, which you can click on for greater detail, shows that Mandalay Resources had debt of US$19.9m at the end of March 2023, a reduction from US$40.3m over a year. However, its balance sheet shows it holds US$36.5m in cash, so it actually has US$16.5m net cash.

How Strong Is Mandalay Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mandalay Resources had liabilities of US$36.8m due within 12 months and liabilities of US$58.1m due beyond that. On the other hand, it had cash of US$36.5m and US$15.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$42.9m.

Mandalay Resources has a market capitalization of US$137.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Mandalay Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Mandalay Resources if management cannot prevent a repeat of the 52% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mandalay Resources'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mandalay Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Mandalay Resources recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Mandalay Resources does have more liabilities than liquid assets, it also has net cash of US$16.5m. So although we see some areas for improvement, we're not too worried about Mandalay Resources's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Mandalay Resources .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.