Is Mandalay Resources (TSE:MND) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Mandalay Resources Corporation (TSE:MND) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Mandalay Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Mandalay Resources had debt of US$25.4m, up from US$20.3m in one year. However, its balance sheet shows it holds US$63.9m in cash, so it actually has US$38.5m net cash.

A Look At Mandalay Resources' Liabilities

The latest balance sheet data shows that Mandalay Resources had liabilities of US$64.5m due within a year, and liabilities of US$44.7m falling due after that. Offsetting these obligations, it had cash of US$63.9m as well as receivables valued at US$22.7m due within 12 months. So it has liabilities totalling US$22.6m more than its cash and near-term receivables, combined.

Given Mandalay Resources has a market capitalization of US$218.2m, 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. Despite its noteworthy liabilities, Mandalay Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Mandalay Resources grew its EBIT by 123% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mandalay 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, 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 47% of its EBIT, which is weaker 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$38.5m. And we liked the look of last year's 123% year-on-year EBIT growth. So we don't think Mandalay Resources's use of debt is risky. 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 1 warning sign we've spotted with Mandalay Resources .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.