Is Sailfish Royalty (CVE:FISH) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Sailfish Royalty Corp. (CVE:FISH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for Sailfish Royalty

What Is Sailfish Royalty's Debt?

The image below, which you can click on for greater detail, shows that Sailfish Royalty had debt of US$2.97m at the end of September 2020, a reduction from US$10.8m over a year. However, it also had US$2.58m in cash, and so its net debt is US$388.3k.

How Strong Is Sailfish Royalty's Balance Sheet?

According to the last reported balance sheet, Sailfish Royalty had liabilities of US$205.5k due within 12 months, and liabilities of US$3.02m due beyond 12 months. Offsetting these obligations, it had cash of US$2.58m as well as receivables valued at US$97.4k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$546.8k.

Having regard to Sailfish Royalty's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$61.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Sailfish Royalty has virtually no net debt, 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 Sailfish Royalty will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

While Sailfish Royalty's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$2.7m. 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$1.4m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Be aware that Sailfish Royalty is showing 5 warning signs in our investment analysis , and 2 of those can't be ignored...

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. 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.
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