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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Gensource Potash Corporation (CVE:GSP) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Gensource Potash
What Is Gensource Potash's Net Debt?
As you can see below, at the end of March 2022, Gensource Potash had CA$3.99m of debt, up from CA$10.0 a year ago. Click the image for more detail. On the flip side, it has CA$1.27m in cash leading to net debt of about CA$2.72m.
How Healthy Is Gensource Potash's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Gensource Potash had liabilities of CA$2.57m due within 12 months and liabilities of CA$4.07m due beyond that. On the other hand, it had cash of CA$1.27m and CA$343.3k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$5.02m.
Of course, Gensource Potash has a market capitalization of CA$78.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gensource Potash's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Given it has no significant operating revenue at the moment, shareholders will be hoping Gensource Potash can make progress and gain better traction for the business, before it runs low on cash.
Caveat Emptor
Importantly, Gensource Potash had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$4.8m at the EBIT level. 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. However, it doesn't help that it burned through CA$6.7m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 6 warning signs for Gensource Potash (2 are a bit unpleasant) you should be aware of.
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.
About TSXV:GSP
Slight and overvalued.
