We Think Ceylon Graphite (CVE:CYL) Has A Fair Chunk Of 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.' 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. As with many other companies Ceylon Graphite Corp. (CVE:CYL) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ceylon Graphite

What Is Ceylon Graphite's Net Debt?

The chart below, which you can click on for greater detail, shows that Ceylon Graphite had CA$2.07m in debt in June 2023; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Ceylon Graphite's Balance Sheet?

We can see from the most recent balance sheet that Ceylon Graphite had liabilities of CA$4.45m falling due within a year, and liabilities of CA$107.0k due beyond that. Offsetting these obligations, it had cash of CA$37.4k as well as receivables valued at CA$99.1k due within 12 months. So its liabilities total CA$4.42m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ceylon Graphite has a market capitalization of CA$8.75m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ceylon Graphite'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 Ceylon Graphite finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Ceylon Graphite had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$1.9m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.2m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 6 warning signs for Ceylon Graphite (4 can't be ignored) you should be aware of.

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.