Is Ceylon Graphite (CVE:CYL) A Risky Investment?

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.' 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. We note that Ceylon Graphite Corp. (CVE:CYL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ceylon Graphite

What Is Ceylon Graphite's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Ceylon Graphite had debt of CA$2.09m, up from CA$1.77m in one year. However, its balance sheet shows it holds CA$2.50m in cash, so it actually has CA$415.8k net cash.

How Strong Is Ceylon Graphite's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ceylon Graphite had liabilities of CA$3.61m due within 12 months and liabilities of CA$14.4k due beyond that. Offsetting this, it had CA$2.50m in cash and CA$36.9k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.08m.

Of course, Ceylon Graphite has a market capitalization of CA$21.6m, so these liabilities are probably manageable. 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, Ceylon Graphite boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ceylon Graphite will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Ceylon Graphite has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Ceylon Graphite?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ceylon Graphite lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$2.3m of cash and made a loss of CA$3.5m. Given it only has net cash of CA$415.8k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 5 warning signs with Ceylon Graphite (at least 3 which are potentially serious) , 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.

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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.