Does KEFI Gold and Copper (LON:KEFI) Have A Healthy Balance Sheet?

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.' 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. Importantly, KEFI Gold and Copper Plc (LON:KEFI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 KEFI Gold and Copper

What Is KEFI Gold and Copper's Debt?

You can click the graphic below for the historical numbers, but it shows that KEFI Gold and Copper had UK£1.18m of debt in December 2022, down from UK£1.33m, one year before. On the flip side, it has UK£220.0k in cash leading to net debt of about UK£960.0k.

How Healthy Is KEFI Gold and Copper's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KEFI Gold and Copper had liabilities of UK£5.18m due within 12 months and no liabilities due beyond that. Offsetting this, it had UK£220.0k in cash and UK£463.0k in receivables that were due within 12 months. So it has liabilities totalling UK£4.50m more than its cash and near-term receivables, combined.

Given KEFI Gold and Copper has a market capitalization of UK£23.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if KEFI Gold and Copper can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, investors are probably hoping that KEFI Gold and Copper finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months KEFI Gold and Copper produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping UK£3.1m. 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. However, it doesn't help that it burned through UK£6.7m of cash over the last year. So in short it's a really risky stock. 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. Be aware that KEFI Gold and Copper is showing 6 warning signs in our investment analysis , and 4 of those are significant...

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.

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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.