Here's Why Bluestone Resources (CVE:BSR) Can Afford Some Debt

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.' 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. We can see that Bluestone Resources Inc. (CVE:BSR) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bluestone Resources

What Is Bluestone Resources's Net Debt?

As you can see below, at the end of December 2023, Bluestone Resources had US$12.0m of debt, up from US$6.00m a year ago. Click the image for more detail. However, it also had US$708.6k in cash, and so its net debt is US$11.3m.

A Look At Bluestone Resources' Liabilities

The latest balance sheet data shows that Bluestone Resources had liabilities of US$3.70m due within a year, and liabilities of US$23.7m falling due after that. On the other hand, it had cash of US$708.6k and US$76.0k worth of receivables due within a year. So it has liabilities totalling US$26.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Bluestone Resources has a market capitalization of US$55.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bluestone Resources can strengthen its balance sheet over time. 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 Bluestone Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Bluestone Resources had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$8.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$9.9m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Bluestone Resources (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.