Klondike Silver (CVE:KS) Is Carrying A Fair Bit Of 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.' 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. We can see that Klondike Silver Corp. (CVE:KS) does use debt in its business. But is this debt a concern to shareholders?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Klondike Silver

What Is Klondike Silver's Net Debt?

As you can see below, at the end of August 2022, Klondike Silver had CA$2.04m of debt, up from CA$1.32m a year ago. Click the image for more detail. However, it does have CA$229.3k in cash offsetting this, leading to net debt of about CA$1.81m.

A Look At Klondike Silver's Liabilities

The latest balance sheet data shows that Klondike Silver had liabilities of CA$1.20m due within a year, and liabilities of CA$2.06m falling due after that. Offsetting these obligations, it had cash of CA$229.3k as well as receivables valued at CA$9.6k due within 12 months. So its liabilities total CA$3.03m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Klondike Silver has a market capitalization of CA$10.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 CA$661k 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.3m of cash over the last year. So suffice it to say we consider the stock very risky. 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 6 warning signs for Klondike Silver you should be aware of, and 4 of them are a bit unpleasant.

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.