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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, KEFI Gold and Copper Plc (LON:KEFI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KEFI Gold and Copper

What Is KEFI Gold and Copper's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 KEFI Gold and Copper had UK£3.08m of debt, an increase on UK£1.88m, over one year. However, because it has a cash reserve of UK£982.0k, its net debt is less, at about UK£2.09m.

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£12.0m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of UK£982.0k and UK£490.0k worth of receivables due within a year. So its liabilities total UK£10.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because KEFI Gold and Copper is worth UK£41.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is KEFI Gold and Copper'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 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. Indeed, it lost a very considerable UK£5.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£6.4m 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for KEFI Gold and Copper (of which 3 shouldn't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.