Does South Star Battery Metals (CVE:STS) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies South Star Battery Metals Corp. (CVE:STS) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 South Star Battery Metals

What Is South Star Battery Metals's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 South Star Battery Metals had debt of CA$2.58m, up from none in one year. However, its balance sheet shows it holds CA$5.22m in cash, so it actually has CA$2.65m net cash.

A Look At South Star Battery Metals' Liabilities

Zooming in on the latest balance sheet data, we can see that South Star Battery Metals had liabilities of CA$3.65m due within 12 months and liabilities of CA$484.2k due beyond that. Offsetting this, it had CA$5.22m in cash and CA$32.5k in receivables that were due within 12 months. So it actually has CA$1.12m more liquid assets than total liabilities.

This short term liquidity is a sign that South Star Battery Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that South Star Battery Metals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is South Star Battery Metals'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.

Since South Star Battery Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is South Star Battery Metals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months South Star Battery Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$3.1m of cash and made a loss of CA$3.3m. Given it only has net cash of CA$2.65m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example - South Star Battery Metals has 4 warning signs we think you should be aware of.

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.