Is Graphite One (CVE:GPH) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Graphite One Inc. (CVE:GPH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Graphite One

How Much Debt Does Graphite One Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Graphite One had debt of US$6.31m, up from US$5.65m in one year. However, it does have US$6.38m in cash offsetting this, leading to net cash of US$67.3k.

How Strong Is Graphite One's Balance Sheet?

The latest balance sheet data shows that Graphite One had liabilities of US$7.00m due within a year, and liabilities of US$85.9k falling due after that. On the other hand, it had cash of US$6.38m and US$19.7k worth of receivables due within a year. So it has liabilities totalling US$690.4k more than its cash and near-term receivables, combined.

Having regard to Graphite One'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$108.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, 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 it is Graphite One's earnings that will influence how the balance sheet holds up in the future. 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.

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

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. Indeed, in that time it burnt through US$16m of cash and made a loss of US$8.3m. With only US$67.3k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 5 warning signs for Graphite One you should be aware of, and 3 of them don't sit too well with us.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.