Solaris Resources (TSE:SLS) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Solaris Resources Inc. (TSE:SLS) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Solaris Resources

What Is Solaris Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Solaris Resources had US$31.4m of debt, an increase on none, over one year. However, it does have US$54.1m in cash offsetting this, leading to net cash of US$22.7m.

A Look At Solaris Resources' Liabilities

We can see from the most recent balance sheet that Solaris Resources had liabilities of US$10.4m falling due within a year, and liabilities of US$34.2m due beyond that. Offsetting these obligations, it had cash of US$54.1m as well as receivables valued at US$270.0k due within 12 months. So it actually has US$9.88m more liquid assets than total liabilities.

This short term liquidity is a sign that Solaris Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Solaris Resources has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Solaris 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.

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

So How Risky Is Solaris Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Solaris Resources had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$38m and booked a US$49m accounting loss. But at least it has US$22.7m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Solaris Resources is showing 5 warning signs in our investment analysis , and 3 of those don't sit too well with us...

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.