Would Tsodilo Resources (CVE:TSD) Be Better Off With Less 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.' 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. Importantly, Tsodilo Resources Limited (CVE:TSD) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Tsodilo Resources

How Much Debt Does Tsodilo Resources Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Tsodilo Resources had debt of US$2.10m, up from US$1.58m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Tsodilo Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tsodilo Resources had liabilities of US$3.42m due within 12 months and liabilities of US$5.5k due beyond that. Offsetting these obligations, it had cash of US$40.1k as well as receivables valued at US$60.3k due within 12 months. So it has liabilities totalling US$3.33m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$5.29m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Tsodilo Resources will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that Tsodilo Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Tsodilo Resources had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$1.2m. 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$895k of cash over the last year. So suffice it to say we consider the stock very risky. 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 instance, we've identified 6 warning signs for Tsodilo Resources (4 are concerning) 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.

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

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.