Stratabound Minerals (CVE:SB) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Stratabound Minerals Corp. (CVE:SB) does carry debt. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that SB is potentially overvalued!

What Is Stratabound Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Stratabound Minerals had debt of CA$3.76m, up from none in one year. However, it also had CA$2.09m in cash, and so its net debt is CA$1.68m.

A Look At Stratabound Minerals' Liabilities

We can see from the most recent balance sheet that Stratabound Minerals had liabilities of CA$6.37m falling due within a year, and liabilities of CA$13.9k due beyond that. Offsetting this, it had CA$2.09m in cash and CA$117.7k in receivables that were due within 12 months. So it has liabilities totalling CA$4.18m more than its cash and near-term receivables, combined.

Stratabound Minerals has a market capitalization of CA$9.78m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Stratabound Minerals will need earnings to service that debt. 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

Over the last twelve months Stratabound Minerals produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$2.0m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$3.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 6 warning signs for Stratabound Minerals you should be aware of, and 5 of them are a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.