Is Graphite One (CVE:GPH) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Graphite One

How Much Debt Does Graphite One Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Graphite One had US$6.17m of debt, an increase on US$5.44m, over one year. However, its balance sheet shows it holds US$10.2m in cash, so it actually has US$4.00m net cash.

How Strong Is Graphite One's Balance Sheet?

According to the last reported balance sheet, Graphite One had liabilities of US$8.25m due within 12 months, and liabilities of US$184.3k due beyond 12 months. Offsetting these obligations, it had cash of US$10.2m as well as receivables valued at US$28.1k due within 12 months. So it can boast US$1.76m more liquid assets than total liabilities.

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$128.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Graphite One 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 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.

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. And over the same period it saw negative free cash outflow of US$11m and booked a US$4.4m accounting loss. Given it only has net cash of US$4.00m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4 of them can't be ignored.

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.