Would Klondike Silver (CVE:KS) Be Better Off With Less Debt?

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. As with many other companies Klondike Silver Corp. (CVE:KS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Klondike Silver

What Is Klondike Silver's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of November 2023 Klondike Silver had CA$2.57m of debt, an increase on CA$2.10m, over one year. On the flip side, it has CA$66.3k in cash leading to net debt of about CA$2.50m.

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$1.66m due within 12 months and liabilities of CA$2.56m due beyond that. Offsetting these obligations, it had cash of CA$66.3k as well as receivables valued at CA$21.0k due within 12 months. So it has liabilities totalling CA$4.13m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Klondike Silver is worth CA$9.40m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 it is Klondike Silver's earnings that will influence how the balance sheet holds up in the future. 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

Importantly, Klondike Silver had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$738k. 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$593k of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Klondike Silver (at least 4 which make us uncomfortable) , and understanding them should be part of your investment process.

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.