Here's Why Mandalay Resources (TSE:MND) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Mandalay Resources Corporation (TSE:MND) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, 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.

View 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$20.3m at the end of June 2023, a reduction from US$36.5m over a year. But on the other hand it also has US$34.7m in cash, leading to a US$14.3m net cash position.

How Strong Is Mandalay Resources' Balance Sheet?

We can see from the most recent balance sheet that Mandalay Resources had liabilities of US$35.9m falling due within a year, and liabilities of US$55.2m due beyond that. Offsetting these obligations, it had cash of US$34.7m as well as receivables valued at US$12.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$43.8m.

This deficit isn't so bad because Mandalay Resources is worth US$105.2m, and thus could probably raise enough capital to shore up 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 67% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mandalay Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Mandalay Resources's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Mandalay Resources does have more liabilities than liquid assets, it also has net cash of US$14.3m. So while Mandalay Resources does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Mandalay 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.