Is Graphite One (CVE:GPH) 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. As with many other companies Graphite One Inc. (CVE:GPH) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Graphite One

What Is Graphite One's Net Debt?

As you can see below, at the end of June 2021, Graphite One had US$6.00m of debt, up from US$5.21m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$8.79m in cash, so it actually has US$2.80m net cash.

A Look At Graphite One's Liabilities

According to the last reported balance sheet, Graphite One had liabilities of US$1.03m due within 12 months, and liabilities of US$6.07m due beyond 12 months. Offsetting this, it had US$8.79m in cash and US$10.0k in receivables that were due within 12 months. So it actually has US$1.70m more liquid assets than total liabilities.

This surplus suggests that Graphite One has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Graphite One boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Graphite One 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 Graphite One has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Graphite One?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Graphite One had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$4.7m and booked a US$4.1m accounting loss. With only US$2.80m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Graphite One (at least 3 which are a bit unpleasant) , 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.
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