Tsodilo Resources (CVE:TSD) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Tsodilo Resources Limited (CVE:TSD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tsodilo Resources

What Is Tsodilo Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Tsodilo Resources had US$1.58m of debt, an increase on US$937.7k, over one year. However, because it has a cash reserve of US$46.5k, its net debt is less, at about US$1.53m.

A Look At Tsodilo Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Tsodilo Resources had liabilities of US$2.59m due within 12 months and liabilities of US$10.7k due beyond that. Offsetting these obligations, it had cash of US$46.5k as well as receivables valued at US$68.0k due within 12 months. So it has liabilities totalling US$2.49m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tsodilo Resources has a market capitalization of US$8.23m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tsodilo Resources 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.

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

Caveat Emptor

Over the last twelve months Tsodilo Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$2.1m. 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. However, it doesn't help that it burned through US$378k of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Tsodilo Resources (of which 5 don't sit too well with us!) you should know about.

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.