Stratabound Minerals (CVE:SB) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Stratabound Minerals Corp. (CVE:SB) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Stratabound Minerals

What Is Stratabound Minerals's Debt?

The chart below, which you can click on for greater detail, shows that Stratabound Minerals had CA$3.85m in debt in June 2023; about the same as the year before. However, because it has a cash reserve of CA$125.9k, its net debt is less, at about CA$3.72m.

How Healthy Is Stratabound Minerals' Balance Sheet?

We can see from the most recent balance sheet that Stratabound Minerals had liabilities of CA$6.24m falling due within a year, and liabilities of CA$14.2k due beyond that. On the other hand, it had cash of CA$125.9k and CA$53.3k worth of receivables due within a year. So it has liabilities totalling CA$6.08m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$6.57m, so it does suggest shareholders should keep an eye on Stratabound Minerals' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Caveat Emptor

Importantly, Stratabound Minerals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$1.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$2.8m of cash over the last year. 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. For instance, we've identified 6 warning signs for Stratabound Minerals (5 are concerning) you should be aware of.

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.