Stock Analysis

Is Klondike Silver (CVE:KS) Using Too Much Debt?

TSXV:KS
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Klondike Silver Corp. (CVE:KS) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Klondike Silver

How Much Debt Does Klondike Silver Carry?

As you can see below, at the end of August 2023, Klondike Silver had CA$2.59m of debt, up from CA$2.04m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

debt-equity-history-analysis
TSXV:KS Debt to Equity History November 3rd 2023

How Strong Is Klondike Silver's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Klondike Silver had liabilities of CA$1.76m due within 12 months and liabilities of CA$2.47m due beyond that. Offsetting these obligations, it had cash of CA$4.2k as well as receivables valued at CA$261.7k due within 12 months. So it has liabilities totalling CA$3.96m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Klondike Silver is worth CA$6.70m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Klondike Silver 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 Klondike Silver finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Klondike Silver produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$850k at the EBIT level. 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. However, it doesn't help that it burned through CA$733k 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. Be aware that Klondike Silver is showing 6 warning signs in our investment analysis , and 5 of those are potentially serious...

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.

Valuation is complex, but we're here to simplify it.

Discover if Klondike Silver might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.