KEFI Gold and Copper (LON:KEFI) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 KEFI Gold and Copper Plc (LON:KEFI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KEFI Gold and Copper

What Is KEFI Gold and Copper's Debt?

As you can see below, at the end of June 2023, KEFI Gold and Copper had UK£1.88m of debt, up from UK£112.0k a year ago. Click the image for more detail. However, it also had UK£389.0k in cash, and so its net debt is UK£1.49m.

A Look At KEFI Gold and Copper's Liabilities

Zooming in on the latest balance sheet data, we can see that KEFI Gold and Copper had liabilities of UK£4.72m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of UK£389.0k as well as receivables valued at UK£1.05m due within 12 months. So its liabilities total UK£3.27m more than the combination of its cash and short-term receivables.

Since publicly traded KEFI Gold and Copper shares are worth a total of UK£31.8m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine KEFI Gold and Copper's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since KEFI Gold and Copper has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Importantly, KEFI Gold and Copper had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£3.2m. 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. Another cause for caution is that is bled UK£4.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. 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 3 of those can't be ignored...

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.