Would KEFI Gold and Copper (LON:KEFI) 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. We note that KEFI Gold and Copper Plc (LON:KEFI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KEFI Gold and Copper

How Much Debt Does KEFI Gold and Copper Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 KEFI Gold and Copper had UK£2.26m of debt, an increase on UK£403.0k, over one year. On the flip side, it has UK£948.0k in cash leading to net debt of about UK£1.32m.

A Look At KEFI Gold and Copper's Liabilities

According to the balance sheet data, KEFI Gold and Copper had liabilities of UK£6.03m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of UK£948.0k as well as receivables valued at UK£226.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£4.86m.

This deficit isn't so bad because KEFI Gold and Copper is worth UK£22.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. Indeed, it lost a very considerable UK£2.8m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£5.4m 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 7 warning signs for KEFI Gold and Copper (3 are significant) you should be aware of.

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.

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.

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