Warren Buffett famously said, '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. Importantly, Gensource Potash Corporation (CVE:GSP) does carry debt. But the real question is whether this debt is making the company risky.
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 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. 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 Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Gensource Potash had debt of CA$5.27m, up from CA$4.29m in one year. However, because it has a cash reserve of CA$305.0k, its net debt is less, at about CA$4.97m.
How Healthy Is Gensource Potash's Balance Sheet?
The latest balance sheet data shows that Gensource Potash had liabilities of CA$6.13m due within a year, and liabilities of CA$3.18m falling due after that. On the other hand, it had cash of CA$305.0k and CA$234.5k worth of receivables due within a year. So it has liabilities totalling CA$8.77m more than its cash and near-term receivables, combined.
Given Gensource Potash has a market capitalization of CA$48.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gensource Potash 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.
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. To be specific the EBIT loss came in at CA$4.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$4.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 6 warning signs we've spotted with Gensource Potash (including 3 which are concerning) .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
