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

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. As with many other companies Stratabound Minerals Corp. (CVE:SB) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Stratabound Minerals

What Is Stratabound Minerals's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Stratabound Minerals had debt of CA$4.59m, up from CA$3.96m in one year. However, it does have CA$431.6k in cash offsetting this, leading to net debt of about CA$4.16m.

A Look At Stratabound Minerals' Liabilities

We can see from the most recent balance sheet that Stratabound Minerals had liabilities of CA$2.73m falling due within a year, and liabilities of CA$3.40m due beyond that. On the other hand, it had cash of CA$431.6k and CA$17.0k worth of receivables due within a year. So it has liabilities totalling CA$5.69m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$6.92m, 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 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 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$1.7m 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. Another cause for caution is that is bled CA$1.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Stratabound Minerals has 6 warning signs (and 5 which are a bit unpleasant) we think you should know about.

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.

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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.