We Think Champion Bear Resources (CVE:CBA) Has A Fair Chunk Of Debt

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.' 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 Champion Bear Resources Ltd. (CVE:CBA) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Champion Bear Resources

How Much Debt Does Champion Bear Resources Carry?

As you can see below, at the end of June 2024, Champion Bear Resources had CA$2.42m of debt, up from CA$300.8k a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Champion Bear Resources' Balance Sheet?

The latest balance sheet data shows that Champion Bear Resources had liabilities of CA$3.16m due within a year, and liabilities of CA$311.5k falling due after that. On the other hand, it had cash of CA$2.1k and CA$7.3k worth of receivables due within a year. So it has liabilities totalling CA$3.46m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$4.84m, so it does suggest shareholders should keep an eye on Champion Bear Resources' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Champion Bear Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

Over the last twelve months Champion Bear Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$360k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$215k of cash over the last year. So to be blunt we think it 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. We've identified 4 warning signs with Champion Bear Resources , and understanding them should be part of your investment process.

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.