Is Bluestone Resources (CVE:BSR) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Bluestone Resources Inc. (CVE:BSR) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Bluestone Resources

What Is Bluestone Resources's Net Debt?

As you can see below, at the end of June 2024, Bluestone Resources had US$15.0m of debt, up from US$9.00m a year ago. Click the image for more detail. However, it does have US$779.5k in cash offsetting this, leading to net debt of about US$14.2m.

A Look At Bluestone Resources' Liabilities

According to the last reported balance sheet, Bluestone Resources had liabilities of US$19.0m due within 12 months, and liabilities of US$11.5m due beyond 12 months. Offsetting this, it had US$779.5k in cash and US$51.9k in receivables that were due within 12 months. So its liabilities total US$29.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$33.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Bluestone 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.

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

Over the last twelve months Bluestone Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$7.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$7.4m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for Bluestone Resources (3 are significant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.