Does Sigma Lithium (CVE:SGMA) Have A Healthy Balance Sheet?

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.' 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, Sigma Lithium Corporation (CVE:SGMA) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sigma Lithium

What Is Sigma Lithium's Debt?

The image below, which you can click on for greater detail, shows that Sigma Lithium had debt of CA$2.96m at the end of March 2021, a reduction from CA$4.32m over a year. However, its balance sheet shows it holds CA$46.8m in cash, so it actually has CA$43.9m net cash.

How Strong Is Sigma Lithium's Balance Sheet?

We can see from the most recent balance sheet that Sigma Lithium had liabilities of CA$3.86m falling due within a year, and liabilities of CA$4.22m due beyond that. Offsetting this, it had CA$46.8m in cash and CA$337.9k in receivables that were due within 12 months. So it actually has CA$39.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Sigma Lithium could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sigma Lithium boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sigma Lithium's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Sigma Lithium has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Sigma Lithium?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sigma Lithium had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$6.9m of cash and made a loss of CA$7.7m. Given it only has net cash of CA$43.9m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sigma Lithium is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.