Is Stratabound Minerals (CVE:SB) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Stratabound Minerals Corp. (CVE:SB) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Stratabound Minerals

What Is Stratabound Minerals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Stratabound Minerals had CA$3.68m of debt, an increase on none, over one year. However, its balance sheet shows it holds CA$4.01m in cash, so it actually has CA$324.5k net cash.

How Strong Is Stratabound Minerals' Balance Sheet?

The latest balance sheet data shows that Stratabound Minerals had liabilities of CA$7.14m due within a year, and liabilities of CA$13.9k falling due after that. Offsetting this, it had CA$4.01m in cash and CA$71.5k in receivables that were due within 12 months. So its liabilities total CA$3.07m more than the combination of its cash and short-term receivables.

Of course, Stratabound Minerals has a market capitalization of CA$16.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Stratabound Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Stratabound Minerals'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 Stratabound Minerals finds some valuable resources, before it runs out of money.

So How Risky Is Stratabound Minerals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Stratabound Minerals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$4.2m of cash and made a loss of CA$1.5m. With only CA$324.5k on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Stratabound Minerals is showing 6 warning signs in our investment analysis , and 4 of those make us uncomfortable...

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.

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.

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